CONSTRUCTING AND DECONSTRUCTING THE STOWERS DEMAND LETTER

MICHAEL W. HUDDLESTON Shannon, Gracey, Ratliff & Miller, L.L.P.

2500 Lincoln Plaza 500 North Akard Street

Dallas, Texas 75201

Telephone: 214.245.3075 Telefax: 214.245.3097

E-Mail: mhuddleston@shannongracey.com

State Bar of Texas 3RD ANNUAL ADVANCED

INSURANCE LAW COURSE March 30-31, 2006

Dallas

CHAPTER 4

Any opinions expressed in this article are the author’s alone and not necessarily those of Shannon, Gracey, Ratliff & Miller, L.L.P., or its clients. The author wishes to acknowledge and thank his colleague, Michael W. Huddleston, for his generous assistance in the preparation of this paper. Any errors herein remain the sole responsibility of the author.

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Curriculum Vitae

Michael W. Huddleston Shannon, Gracey, Ratliff & Miller, L.L.P.

Shareholder 500 North Akard, Suite 2500,

Dallas, Texas 75201 214/245-3075

mhuddleston@shannongracey.com EDUCATIONAL BACKGROUND

• Southern Methodist University J.D. - 1983; Texas A&M University 1980 (G.P.A. - 4.0) B.A. - Summa Cum Laude

PROFESSIONAL ACTIVITIES

• Insurance Section of the State Bar of Texas A Founding Officer and Past-Chair

• Dallas Bar Association Tort & Insurance Practice Section Council Member (2004-2005)

• Dallas Bar Association Appellate Section Founding Officer and Past-Chair

• Master, Mack Taylor Inn of Court • Member of the State Bar College • Best Lawyers in America 2006 • Texas Monthly Magazine – Texas Super Lawyer • Chambers & Partners, Chambers USA, “America’s Leading Lawyers for Business,

Leading Individuals in the field of Insurance Law,” (2003-2006) LAW RELATED PUBLICATIONS AND SEMINARS

• American Bar Association, Tort Trial & Insurance Practice Section “Navigating the Insurance Litigation Dispute Through Stormy Seas,” 2006: A Reimbursement Odyssey, The Stange Journey of Frank's Casing Crew, 14th Annual Insurance Coverage, Litigation Committee Midyear Program, The Ritz-Carlton, Marina del Rey, California, February 16-18, 2006;

• South Texas College of Law, Texas Insurance Law Symposium, Punitive Damages Coverage, (January 28, 2005);

• University of Texas, 10th Annual Insurance Law Institute, Use and Abuse of Insurance Experts (December 7-9, 2005);

• The Texas Institute of Continuing Legal Education, Construction Law Section of the State Bar of Texas, The Basic Course in Construction Law, Insurance Basics for the Construction Practitioner (Oct. 2005)

• State Bar of Texas, Second Annual Advanced Insurance Law Course, Hard Choices--A Policyholder's Perspective on Post-Verdict Options (March 31-April 1, 2005);

• American Bar Association, Insurance Coverage Litigation Committee CLE/Seminar, "Dancing After the Party is Over: How to Keep the Judgment Debtor Policyholder Out of Bankruptcy While Litigating Coverage," (Tucson, Ariz., March 3-5, 2005)

• Dallas Bar Association, Noon at the Belo Mansion, CLE on "Insurance Coverage for Punitive Damages," (January 27, 2005)

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SIGNIFICANT APPELLATE DECISIONS

• State Farm v. Gandy (Tex. 1996)(eliminating "sweetheart" liability insurance deals) • Christophersen v. Allied-Signal (5th Cir. 1990)(en banc)(adopting test for expert testimony pre-

Daubert) • Rose v. Doctors Hospital (Tex. 1990)(holding statutory med-mal caps constitutional) • St. Paul Fire v. Convalescent Services (5th Cir. 1999)(no duty to settle based on uncovered claims) • State Farm v. Williams (Tex. App.--Dallas 1990, writ denied)(proof of prejudice to establish waiver

and estoppel) • Pennsylvania Nat. v. Kitty Hawk Airways (5th Cir. 1992)(same).

HOBBIES

• Father of two • Book-collector (Churchill and Lloyd George) • Jazz/Rock saxophonist • Journeyman Golfer

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Table of Contents

I. Introduction ............................................................................................................................................................ 1

II. The Legal Basics ....................................................................................................................................................... 1

A. Basic Duties and Requirements ......................................................................................................................... 1 1. Duty ............................................................................................................................................................... 1

a. Sources and Nature.................................................................................................................................... 1 b. Frank's Impact ........................................................................................................................................... 1 c. Subsidiary Considerations......................................................................................................................... 2

2. Elements ........................................................................................................................................................ 2

B. Statute of Frauds in Tort--In Writing or Not......................................................................................................... 3

C. Covered Claim ...................................................................................................................................................... 4

D. Within Limits ..................................................................................................................................................... 6

E. Unconditional Offer ........................................................................................................................................... 7 1. General Rule .................................................................................................................................................. 7 2. Excess Carriers .............................................................................................................................................. 7

F. Offer of a Complete Release .............................................................................................................................. 7

G. Frank's Casing--A New Strategy for Policyholders? ......................................................................................... 8 1. The Underlying Facts .................................................................................................................................... 8 2. Scenario One--Stowers Demand--Be Careful What You Ask For .............................................................. 10

a. Matagorda Rationale--Pushing a Settlement the Insured Cannot Pay..................................................... 10 b. Estoppel?--Transforming the Matagorda Rationale from Ability to Pay to Reasonableness Based on Liability Exposure ................................................................................................................................... 10 c. Public Policy Benefits of Reimbursement............................................................................................... 12

3. Scenario No. 2--Express Agreement Offer Should Be Accepted ................................................................ 12 4. Concurring Opinions--Seeds of Conflict ..................................................................................................... 13

a. Justice Hecht ........................................................................................................................................... 13 b. Justice Wainwright .................................................................................................................................. 14 c. Justice O'Neill ......................................................................................................................................... 14

5. Motion for Rehearing .................................................................................................................................. 15 6. Response to Rehearing ................................................................................................................................ 16 7. Post-Decision Amicus Briefs....................................................................................................................... 16

a. TCJL Amicus Brief ................................................................................................................................. 16 b. Texas Association of Defense Counsel Amicus Letter ........................................................................... 16 c. Amicus of Pilco, Inc................................................................................................................................ 16 d. United Policyholders Amicus.................................................................................................................. 17

H. Multiple Claimants/Insureds ............................................................................................................................ 17

III. Practical Suggestions for Drafting Stowers Demands ..................................................................................... 18

A. Offer Must Be "Clear and Undisputed"--So, Put It In Writing ........................................................................ 18

B. Timing or Buying Time ................................................................................................................................... 18

C. Reasonable Time Limits .................................................................................................................................. 19

D. Definite Identification of Parties...................................................................................................................... 19

E. Definite Amount Within Limits ....................................................................................................................... 19

F. Resolve Any Doubts About the Limits Prior to Making the Offer .................................................................. 20

G. Bulk Offers....................................................................................................................................................... 20

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H. Bifurcated Offers--Excess Carriers and Insured Contributions ....................................................................... 20

I. Offer a Full Release, Including Any Liens ...................................................................................................... 21

J. Consider Whether a Detailed Discussion of the Case is Warranted ................................................................ 21

K. Argue Coverage ............................................................................................................................................... 22

L. If in Doubt, Send It To Defense Counsel ......................................................................................................... 22

M. Special Problems Presented Where Risk Allocation is Involved..................................................................... 22

N. Consent to Settle .......................................................................................................................................... 22

O. Mediation? ....................................................................................................................................................... 22

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Table of Authorities Cases American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994) ................................................... 1, 3, 4, 5 American States Ins. Co. of Texas v. Arnold, 930 S.W.2d 196 (Tex. App.–Dallas 1996, writ denied) ........................ 19 Ansonia Assoc. Ltd. v. Public Service Mut. Ins. Co., 257 A.D.2d 84, 692 N.Y.S.2d 5 (1999)....................................... 7 Atlantic Lloyds Ins. Co. v. Butler, 137 S.W.3d 199 (Tex. App.--Houston [1st Dist.] 2004, pet. denied) ..................... 18 Birmingham Fire Ins. Co. v. American Nat’l Fire Ins. Co., 947 S.W.2d 592 (Tex. App.–Texarkana 1997, writ denied).................................................................................................................. 3 Bleeker is Nationwide Mut. Ins. Co. v. Chaney, 2002 WL 31178068 (N.D. Tex. 2002).............................................. 10 Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106 Cal.Rptr. 535, 22 P.3d 313 (2001) ........................................... 13 Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex. App. –Dallas 1997, writ denied) .................................................... 5 Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, Inc., 2005 WL 1252321, at *1 (Tex., May

27, 2005) (motion for rehearing granted Jan. 6, 2006) ................................................................................... 2, 10, 11 Excess Underwriters at Lloyds, London v. Frank's Casing Crew & Rental Tools, 92 S.W.3d 178 (Tex. App.--

Houston [14th Dist.], 2002, petition pending) .......................................................................................................... 11 Fulks v. CIGNA Lloyds Ins. Co., 1996 Tex. LEXIS (Tex. App.–Houston [1st Dist.], July 25, 1996, no writ) ............... 3 G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved)

.................................................................................................................................................................................... 1 Hanson v. Republic Ins. Co., 5 S.W.2d 324 (Tex. App.–Houston [1st Dist.] 1999, no writ) .......................................... 8 Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, Inc., 215 S.W.2d 904 (Tex. App.--Beaumont 1948,

writ ref'd n.r.e.) ........................................................................................................................................................... 1 In re Dana Corp., 138 S.W.3d 298 (Tex. 2004) ........................................................................................................... 22 Insurance Corp. of America v. Webster, 906 S.W.2d 77 (Tex. App.--Houston [1st Dist.] 1995, writ denied) .......... 3, 8 Jones v. Highway Ins. Underwriters, 253 S.W.2d 1018 (Tex. Civ. App.--Galveston 1952, writ ref'd n.r.e.) ................ 8 Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000)....................................................... 8 Lira v. Shelter Ins. Co., 913 P.2d 514 (Co. 1996)........................................................................................................... 7 London Mkt. Cos. v. Schattman, 811 S.W.2d 550, 552 (Tex. 1991, orig. proceeding)................................................... 4 Maryland Ins. Co. v. Head, 938 S.W.2d 27 (Tex. 1996) ................................................................................................ 5 Matagorda County v. Texas Ass’n of Counties Govt. Risk Mgmt. Pool, 52 S.W.3d 128 (Tex. 2000)............................ 2 Medical Malpractice Joint Underwriting Assoc. of Mass. v. Goldberg, 425 Mass. 46, 680 N.E.2d 121 (1997) ......... 14 Mid-Century Ins. Co. v. Childs, 15 S.W.3d 187 (Tex. App.–Texarkana 2000, no pet. h.) ........................................... 20 Mt. Airy Ins. Co. v. Doe Law Firm, 668 So.2d 534 (Ala. 1995) ................................................................................... 14 PPG Industries, Inc. v. Transamerica Ins. Co., 84 Cal. Rptr. 2d 455 (1999) ................................................................. 7 Pullin v. Southern Farm Bureau Cas. Ins. Co., 874 F.2d 1055 (5th Cir. 1989) ....................................................... 5, 22 Rocor International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002)..... 1, 3, 4, 17 Rosell v. Farmers Texas County Mut. Ins. Co., 642 S.W.2d 278 (Tex. App.–Texarkana 1982, no writ)................. 5, 22 Soto v. State Farm Ins. Co., 635 N.E.2d 1222 (N.Y. 1994)............................................................................................ 6 St. Paul Fire & Marine Ins. Co. v. Convalescent Services, Inc., 193 S.W.2d 340 (5th Cir. 1999).................................. 5 St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 917 S.W.2d 29 (Tex. App.—Amarillo 1995), aff’d in part,

rev’d in part on other grounds, 974 S.W.2d 51 (Tex. 1998)...................................................................................... 5 State Farm Automobile Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998)....................................................................... 5 State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38 (Tex. 1998)......................................................................... 8 Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994) ........................................................................ 5, 9, 19 Travelers Ins. Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999).................................................................. 19 Trinity Universal Ins. Co. v. Bleeker, 944 S.W.2d 672 (Tex. App.–Corpus Christi 1997), rev’d, 966 S.W.2d 489 (Tex. 1998) ........................................................................................................................ 3, 9 Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal.App.3d 576, 126 Cal.Rptr. 267 (1975)............................. 14 Vitek, Inc. v. Floyd, 51 F.3d 530 (5th Cir. 1995) ........................................................................................................... 20 Watters v. Guaranty Nat. Ins. Co., 300 Mont. 91 (2000).............................................................................................. 10 Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172 (Tex. App.--Fort Worth 2004, pet. pending)............ 21 Western Alliance Ins. Co. v. Northern Ins. Co., 176 F.3d 825 (5th Cir. 1999) .............................................................. 20 Willcox v. American Home Assurance Co., 900 F. Supp..850 S.D. Tex. 1995) ........................................................... 24 Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343 (9th Cir. 1983) .................................................... 6

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Other Authorities Jerry, The Insurer's Right to Reimbursement of Defense Costs, 42 ARIZ. L. REV. 13, 70 n. 220 (2000) ..................... 13

Constructing and Deconstructing the Stowers Demand Letter Chapter 4

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Constructing and Deconstructing the Stowers Demand Letter I. Introduction This paper is intended to convey some practical ideas regarding the preparation and handling of Stower1s letters. Some confusion exists as to exactly what a Stowers demand is in the first instance. Some believe that it is a letter from the insured to the carrier, demanding that the carrier accept an offer of settlement within policy limits.2 To this author, the Stowers demand is in fact the letter outlining an unconditional offer to settle within the policy limits of the insured's policy. This is the letter upon which this paper focuses. The Stowers demand is the fulcrum of proximate cause in a suit against the carrier for negligent failure to settle. It would be a challenge to find any other instance in tort law where a letter takes on such importance. For insureds and claimants, it is truly a magical missive. For carriers, it has become the focus of intense analysis and carping, as they search for reasons why a given demand letter fails to meet the somewhat obscure requirements that have been developed by the courts for such letters. Hence, the letters are the key to the kingdom for the insured and claimants, but they are also a major source of dyspepsia, chronic depression, stark terror, and, yes, malpractice exposure. This paper does not attempt to resolve the numerous thorny legal debates regarding some aspects of the Stowers demand requirements. Alchemy and metaphysics of this nature are better considered in a séance. Instead, we will use the legal problems to help develop some practical suggestions as to how to navigate making such a demand in a way that maximizes the chances it will pass legal muster and that will enhance the impact it may have on the carrier.

1 G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding approved). 2 Under current Texas law, a demand by the insured is not treated as a prerequisite to bringing a Stowers action for amounts in excess of the policy limits. Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, Inc., 215 S.W.2d 904, 929 (Tex. App.--Beaumont 1948, writ ref'd n.r.e.).

II. The Legal Basics A. Basic Duties and Requirements 1. Duty a. Sources and Nature In Stowers, the court set forth the basic cause of action for the negligent failure of a carrier to accept a settlement offer within the policy limits of a liability policy. Id. at 547. Unlike some other jurisdictions, a carrier in Texas has no duty to initiate or make settlement offers absent a valid Stowers demand. American Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994)(holding carrier has no duty to "make or solicit settlement proposals."). Stowers is negligence standard: "[A]n indemnity company is held to that degree of care and diligence which a man of ordinary prudence would exercise in the management of his own business." Stowers, supra. Thus, Texas has rejected theories of strict liability for excess judgments followed in some jurisdictions. In Stowers, the court held that the right to control the defense and settlement of the underlying claim supported the duty to act reasonably regarding settlement demands within limits. In Rocor International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002), the Court held that the duty to settle may attach to an excess carrier that has no duty to defend under the terms of the contract but which exercises control over the settlement process. Accordingly, a duty may arise as a result of a voluntary assumption of the duty. b. Frank's Impact In Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, Inc., 2005 WL 1252321, at *1 (Tex., May 27, 2005)(motion for rehearing granted Jan. 6, 2006), the Court examined many aspects of the Stowers duty for purposes of determining whether an insured's demand for settlement under Stowers could serve as a basis for estopping the insured from contesting the reasonableness of the settlement amount. The reason this was important in that case was that the carrier settled and sought reimbursement from the insured.

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The Court had previously found that a carrier could not settle and seek reimbursement absent an express agreement with the insured, noting the fact a carrier should not be able to potentially foist an unreasonable settlement on the insured. Matagorda County v. Texas Ass’n of Counties Govt. Risk Mgmt. Pool, 52 S.W.3d 128 (Tex. 2000). The Frank's Court stated:

We have said that the duty imposed by Stowers is to "exercise 'that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.'" We have also said that the Stowers duty is viewed from the perspective of an insurer: "the terms of the demand are such that an ordinarily prudent insurer would accept it." Both statements are correct."

Frank's, supra. The Court stated that when the insured sends a Stowers demand to settle within limits, "it [cannot] not thereafter take the position that the settlement offer was reasonable if the insurer bore the cost of settling but unreasonable if the insured ultimately bore the cost." Id. The Court then provides the legal basis for its rule, estoppel:

Once a insured asserts that a settlement offer has triggered a Stowers duty, and the insurer then accepts that settlement offer or a lower one, the insured is estopped from asserting that the settlement is too financially burdensome for the insured to bear if it turns out the claims against the insured are not covered.

Id. The Frank's Court blended and ultimately transmogrified the concern in Matagorda as to whether the insured was having a financial burden imposed on it that was beyond its finances. When the Court is finished, the sole concern in Matagorda is transformed into whether the underlying settlement was reasonable based on the "'likelihood and degree of the insured's potential exposure to an excess judgment,'" not on whether it has the capacity to pay or not. The Court summarized the rule as follows:

The reasonableness of a settlement offer is not judged by whether the insured has no assets or substantial assets, or whether the

limits of insurance coverage greatly exceed the potential damages for which the insured may be liable. It is an objective assessment of the insured's potential liability.

Id. c. Subsidiary Considerations In Garcia, the court had stated that in the context of Stowers, "‘evidence concerning claims investigation, trial defense, and conduct during settlement negotiations is necessarily subsidiary to the ultimate issue of whether the claimant’s demand was reasonable under the circumstances, such that a reasonable insurer would accept it.’" Id. Thus, these factors are part of the basic considerations regarding liability and damages exposure that are a part of the basic Stowers test. 2. Elements In American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994), the court summarized the Stowers elements as follows:

(1) [T]he claim against the insured is within the scope of coverage [at the time the offer is made], (2) the demand is within policy limits, and (3) the terms of the demand are such that an ordinary prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.

Id. at 849. A demand that is in excess of policy limits, even if based on a mistake of law or fact, is insufficient to amount to a proper Stowers demand. The court did not address the responsibilities of multiple carriers, including primary, excess and reinsurers, which must jointly fund a settlement. Id. at 855 n. 25. The courts have refused to allow variations on Stowers that go outside of the Garcia elements. For example, in Fulks v. CIGNA Lloyds Ins. Co., 1996 Tex. LEXIS (Tex. App.–Houston [1st Dist.], July 25, 1996, no writ), the court held that absent coverage, Stowers did not apply. The court rejected arguments that liability could be predicated on the failure of the carrier to communicate its position regarding

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coverage, thus resulting in the claimant continuing the suit and not settling of the meager available policy limits. This Stowers duty is only activated by a valid Stowers settlement demand. The demand must at the very least identify the releasing parties, the parties to be released, be for an unconditional amount within policy limits and propose to release the insured/s fully for a definite sum of money, and offer to provide a release from any outstanding liens. Stowers, supra, at 547; see also Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489, 491 (Tex. 1998); Insurance Corp. of America v. Webster, 906 S.W.2d 77, 81 (Tex. App.--Houston [1st Dist.] 1995, writ denied). All terms must be clear and not subject to dispute. Rocor International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002) B. Statute of Frauds in Tort--In Writing or Not Some cases suggest that a "formal" demand is probably not required. Birmingham Fire Ins. Co. v. American Nat’l Fire Ins. Co., 947 S.W.2d 592, 599-600 (Tex. App.–Texarkana 1997, writ denied). However, informal or "back-channel" "suggestions" regarding what the case could be settled for, coming for example from either the plaintiff’s attorney or the ad litem, are insufficient to satisfy Garcia. Id. An "offer" is "‘[a] proposal to do a thing or pay an amount, usually accompanied by an expected acceptance, counter-offer, return promise or act.’" Id. at 599 n. 2 (quoting BLACK’S LAW DICTIONARY 1081 (1990)). A demand within limits must be distinguished from a "suggestion." Id. In Trinity Universal Ins. Co. v. Bleeker, 944 S.W.2d 672 (Tex.App.- Corpus Christi), rev’d, 966 S.W.2d 489 Tex. 1998),3 the court directly addressed the validity of oral offers and held that oral offers are valid in contract law to the same extent as written offers. The court rejected that argument that Rule 11 of the Texas Rules of Civil Procedure, which requires settlement offers to be in writing in order to be binding when accepted, creates a firm requirement

3 Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998), reversed this holding by determining as a threshold issue that the settlement offer in that case was not valid because it did not provide a full release. Therefore, the Court did not confirm or reject the lower court’s reasoning with respect to oral offers.

that Stowers demands be made in writing. Rule 11 states:

Unless otherwise provided in these rules, no agreement between attorneys or parties touching any suit pending will be enforced unless it is in writing, signed, and filed with the papers as a part of the record, or unless it be made in open court and entered of record.

TEX. R. CIV. P. 11. The Texas Supreme Court reversed Bleeker on other grounds, finding that there had not been a sufficient offer to provide release from liens. The Court did not address the issue of whether the offer must be in writing.

In his article, Essential Requirements to Trigger a

Duty Under the Stowers Doctrine and Unfair Claims Settlement Act, Brent Cooper suggests that the Bleeker court of appeals was wrong in its determination that Rule 11 does not apply to settlement offers. He cites London Mkt. Cos. v. Schattman, 811 S.W.2d 550, 552 (Tex. 1991, orig. proceeding), which illustrates the role of Rule 11 when parties dispute an agreement. The Court there explained that “once the existence of such an agreement becomes disputed, it is unenforceable unless it comports with these (Rule 11) requirements.” However, it appears that this turns on whether a suit is “pending.” Rule 11 specifically refers to a “suit pending” and the cited case discusses this rule in reference to discovery requests. Thus, for pre-suit demands, Rule 11 on its face would be inapplicable.

Other Texas law indicates that an oral offer will be sufficient so long as both parties agree that a Stower offer was made and that the terms were clear. In Rocor International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002), the court explained that:

In Garcia we stated that the Stowers remedy of shifting the risk of an excess judgment onto the insurer is not appropriate unless there is proof that the insurer was presented with a reasonable opportunity to settle within the policy limits. Garcia, 876 S.W.2d at 849. We implied that a formal settlement demand is not absolutely necessary to hold the insurer liable, see id., although that would certainly be the better course. But

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at a minimum we believe that the settlement’s terms must be clear and undisputed. That is because “settlement negotiations are adversarial and…often involve hard bargaining on both sides.” Id. . . . Given the tactical considerations inherent in settlement negotiations, an insurer should not be held liable for failing to accept an offer when the offer’s terms and scope are unclear or are the subject of dispute.

Id. (emphasis added). The Court determined that the oral offer was not a proper settlement demand in Rocor because the proposal did not clearly state the settlement’s terms, nor did it mention a release. Accordingly, the court found that there was no extra-contractual liability. C. Covered Claim A carrier has no Stowers duty to settle as to uncovered claims. American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). Moreover, a carrier is under no obligation to pay more to settle covered claims in order to have the claimant include punitive damages within the settlement. For covered claims, the carrier has complete discretion to settle and cannot commit a tort unless a demand within the limits is unreasonably refused and there is a judgment for covered damages in excess of the policy limits. Dear v. Scottsdale Ins. Co., 947 S.W.2d 908, 916-17 (Tex. App. –Dallas 1997, writ denied)(Hankinson, J.). In Rosell v. Farmers Texas County Mut. Ins. Co., 642 S.W.2d 278, 279 (Tex. App.–Texarkana 1982, no writ), the carrier refused to accept a bulk offer to settle for two occurrence policy limits where one of the two claims was not, in the carrier's opinion, worth a full single limit. The court held that the carrier did not have to pay more for the weak claim in order to get a settlement of the strong claim. Accord Pullin v. Southern Farm Bureau Cas. Ins. Co., 874 F.2d 1055, 1056 (5th Cir. 1989) (Texas law). In St. Paul Fire & Marine Ins. Co. v. Convalescent Services, Inc., 193 S.W.2d 340, 342-43 (5th Cir. 1999), the court, quoting American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, 846 (Tex. 1994), held that a carrier excluding coverage for punitive damages has no duty to settle as

to such uncovered claims. The court rejected arguments that a Stowers duty to settle was triggered where the carrier knew that the insured had significant punitive exposure and that the insured would be willing to contribute to settlement. The court also rejected Ranger v. Guin arguments to the effect that the carrier was negligent in its evaluation and in communicating that evaluation to the insured. Id. The court held that Guin was subsumed within Stowers and was strictly subject to its elements, including coverage and the need for a verdict in excess of limits, under current Texas law as reflected in Garcia, Maryland Ins. Co. v. Head, 938 S.W.2d 27, 28 (Tex. 1996), and State Farm Automobile Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998). By analogy, the court looked to Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (1994), noting that where there are multiple claims and inadequate proceeds, the carrier may look to only the merits of the particular claim and the corresponding particular liability of the insured. Id. at 344. The court reasoned:

Thus, because the Texas Supreme Court does not impose a duty upon insurers to consider other covered claims when faced with a settlement demand by one claimant, we believe that the Court would not impose a duty upon insurers to consider claims that are not covered—here, the punitive damages claims—by its policy during settlement negotiations involving one claimant.

Id. at 345. The court also rejected the argument that the court of appeals opinion in St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 917 S.W.2d 29 (Tex. App.—Amarillo 1995), aff’d in part, rev’d in part on other grounds, 974 S.W.2d 51 (Tex. 1998), supported a claim for negligent claims handling. The court did so based on the then recent holding in Traver, supra, that the Stowers duty subsumes the duty of ordinary care in handling, investigating and evaluating the claim. Finally, the court refused to address the issue of whether the carrier could be found liable for damages not otherwise covered as a result of some tortious conduct. Numerous courts have found such claims barred because they seek to do indirectly what is not permitted directly in those jurisdictions, provide coverage for punitive damages. Id. at 346 n. 13. The courts in other jurisdictions have refused to allow tort claims for bad faith and similar theories to be

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made with respect to punitive damages where coverage for such damages has been found to be contrary to public policy. For example, in Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343 (9th Cir. 1983), the insured brought suit against the insurer alleging that the insurer breached the duty to defend and acted in bad faith in the handling/defending of a suit against the insured. The insurer provided a full defense through an outside firm. The insured also retained its own counsel. Id. at 1345. During the lawsuit, an offer to settle was made in the $200,000 to $250,000 range. The insured urged the insurer to settle and even offered to contribute $20,000 of its own funds. Id. The insurer rejected the offer, and the case was ultimately tried resulting in a verdict of $387,107 in compensatory damages and $30,000 in punitive damages. Id.

The insurer in Zieman paid the entire compensatory damages costs and defense legal fees. The insured subsequently sued the insurer for payment of the punitive damages award for failure to settle and exposing the insured to the risk of punitive damages. In response, the court stated the following:

There is no basis whatever for that claim. [The evidence] clearly demonstrates that counsel retained for [the insured] and counsel for the other entities facing exposure to the Stewart claim conscientiously valued the same as having a jury verdict potential of no more than $100,000. They were wrong, of course, but that does not even suggest bad faith. The proposition that an insurer must settle, at any figure demanded within the policy limits, an action in which punitive damages are sought is nothing short of absurd.

Id. at 1346. In Soto v. State Farm Ins. Co., 635 N.E.2d 1222 (N.Y. 1994), a judgment for $420,000 in compensatory damages and $450,000 in punitive damages was rendered against the insured. An action was then brought against the insurer, for the full amount of the judgment alleging failure to settle within policy limits. Id. at 1223. The insurer in Soto moved to dismiss the complaint for failure to state a claim because New York law held coverage for punitive damages was

against public policy. Id. Both the trial court and the intermediate court accepted the argument, granting the motion and affirming respectively. Id. The New York Court of Appeals upheld the lower courts’ decisions, stating:

As we have noted on other occasions, since punitive damages are not designed to compensate an injured Plaintiff for the actual injury that the person may have suffered, their only real purpose is to punish and deter the wrongdoer [citations omitted]. While the deterrent value of the rule against indemnification may be somewhat attenuated in this context, the rule's equally important goal of preserving the condemnatory and retributive character of punitive damage awards remains clear and undiminished. That goal cannot be reconciled with a conclusion that would allow the insured wrongdoer to divert the economic punishment to an insurer because of the insurer's unrelated, independent wrongful act in improperly refusing a settlement within policy limits.

Id. The court added:

Where an insurer has acted in bad faith in relation to an available pre-trial settlement opportunity, it is guilty only of placing its insured at risk that a jury will deem him or her so morally culpable as to warrant the imposition of punitive damages. Stated another way, an insurer's failure to agree to a settlement, whether reasonable or wrongful, does no more than deprive the insured of a chance to avoid the possibility of having to suffer a punitive award for his or her own misconduct. Regardless of how egregious the insurer's conduct has been, the fact remains that an award of punitive damages that might ensue is still directly attributable to the insured's immoral and blameworthy behavior.

Our system of civil justice may be organized so as to allow a wrongdoer to escape the punitive consequences of his own malfeasance in order that the injured plaintiff may enjoy the advantages of a

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swift and certain pretrial settlement. However, the benefit that a morally culpable wrongdoer obtains as a result of this system, i.e., being released from exposure to liability for punitive damages, is no more than a necessary incident of the process. It is certainly not a right whose loss need be made subject to compensation when a favorable pretrial settlement offer has been wasted by a reckless or faithless insurer.

Id. at 1224-25 (emphasis added). The Supreme Court of Colorado considered similar issues in a suit entitled Lira v. Shelter Ins. Co., 913 P.2d 514 (Co. 1996). In Colorado, an insurer has no duty to settle the compensatory part of a suit in order to minimize the insured's exposure to punitive damages. Id. at 516. Therefore, the court concluded, that the insurance company's duty to settle "did not encompass a duty to protect the petitioner from exposure to punitive damages." Id. at 517. The court reasoned:

The contract between the parties expressly precluded recovery for punitive damages incurred by the insured. The insured may not later utilize the tort of bad faith to effectively shift the cost of punitive damages to his insurer when such damages are expressly precluded by the underlying insurance contract.

. . . .

[To hold otherwise would] force insurers to settle cases involving punitive damages in order to avoid liability for the same punitive damages in subsequent bad faith actions. Such a result would be contrary to the principle that insurers have no absolute duty to settle in order to protect their insureds from punitive judgments. See Zieman, 724 F.2d at 1346.

Id. at 517. The court declined to extend the tort of bad faith to encompass liability for punitive damages from the underlying lawsuit. Id.

The California Supreme Court reached a similar conclusion in PPG Industries, Inc. v. Transamerica Ins. Co., 84 Cal. Rptr. 2d 455 (1999). The court held that the insured could not recover amounts including punitive damages awarded in the underlying suit from the carrier in a bad faith case. The court concluded the insured caused this injury by its own heinous acts. Thus, the court expanded the public policy bar against indemnity for punitive damages to implied indemnity. The leading case for the opposing point of view is Ansonia Assoc. Ltd. v. Public Service Mut. Ins. Co., 257 A.D.2d 84, 692 N.Y.S.2d 5 (1999). In that case, the court found that the carrier’s assertion that punitive damages were not covered was tantamount to economic duress. Id. at 7. The court noted that the insured is put in the position of having to choose between going to trial and getting hit for substantial uncovered damages or having to settle the claim and potentially lose coverage for compensatory damages by settling without the consent of the carrier. The court did not address whether the insurer’s cavalier indifference to its insured’s exposure to potentially ruinous punitive damages, without more, constitutes bad faith. Id. at 7-8. D. Within Limits Garcia is a classic example of a failure to make an offer within limits. The limits are often subject to a great deal of debate from a coverage analysis standpoint. The hard work of predicting the limits applicable has to be done prior to the making of the offer. The policy limits are also altered by settlement of other claims. Thus, if payment has been made to one of multiple claimants, then a demand that is for the full policy limits, without reducing the amount based on the settlement, is not an offer within limits sufficient to invoke Stowers. Soriano, 881 S.W.2d at 315. Similarly, if the policy limits are exhausted through payment under a separate section of the policy, then no Stowers liability can attach because any offer of settlement would be an offer in excess of the limits. Hanson v. Republic Ins. Co., 5 S.W.2d 324 (Tex. App.–Houston [1st Dist.] 1999, no writ). An error of law by the claimant in making its demand for limits will still prevent the offer from being sufficient to satisfy the elements of Stowers. State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d

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38, 41 (Tex. 1998). Thus, the ability to discover the policy and properly interpret it is critical for the claimant. Some plaintiff’s counsel suggest that the need for accuracy regarding the limits of liability also requires disclosure of reservation of rights letters under some circumstances. E. Unconditional Offer 1. General Rule Texas courts have repeatedly held that conditional settlement offers are insufficient to impose Stowers liability. Jones v. Highway Ins. Underwriters, 253 S.W.2d 1018, 1022 (Tex. Civ. App.--Galveston 1952, writ ref'd n.r.e.). In Insurance Corp. of Am. v. Webster, 906 S.W.2d 77 (Tex. App–Houston [1st Dist.] 1995, writ denied), the court held that two offers that were conditioned on the insurer’s representations about the limits of coverage were in fact conditional and thus failed to satisfy Stowers. Because other insurance was in fact in existence, the carrier could not accept the settlement offers. Thus, the court held that liability could not be imposed on that carrier. The situation presented in Webster is very troubling. This author has been involved in at least one case where an interesting variation of the Webster problem arose. In that case, the plaintiff demand settlement for the "carrier's policy limits." The parties disputed whether the plaintiff’s attorney had ever inquired about whether there were other policies with different companies and thus whether there had been any representations regarding this issue. Certainly, if the offer does not indicate that it is contingent on there being no other such policies, then the carrier would not be able to avoid the demand for limits regardless of whether it knew of the existence of an additional policy or not. The clear message from Webster is that plaintiffs need to set up a misrepresentation of limits claim as a hedge on whether there is additional coverage some place other than in their Stowers offer. It could be handled by using interrogatories, simply relying on disclosures, or through separate correspondence. Also, protection could be incorporated into the final settlement documents after acceptance of the offer. None of these methods is perfect, but they do assist in avoiding the problem of rendering the Stowers demand ineffective.

2. Excess Carriers Excess carriers generally have no duty to accept a settlement within their limits until there has been a tender of the underlying limits or exhaustion of underlying limits by the primary carrier. Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000). Apparently, the excess carrier must also have taken over the defense of the case. Id. Thus, the failure of the excess carrier in Keck to respond to the initial settlement demand of $3.6 million could not be used as contributory negligence where the offer came prior to tender of the primary limits and prior to takeover of the defense. Id. The court thus held that even if the excess carrier was negligent in failing to "explore coverage issues more diligently, reserved its rights . . . investigated the merits of the third-party claim more thoroughly, hired independent counsel to monitor the third-party claim, supervised its claim adjuster more closely, and demanded to settle the claim months before trial," it was not actionable because it was based on conduct prior to the tender of the primary limits and because in this pre-tender situation the excess carrier has no duty to defend or indemnify. Id. The court added that pre-tender, the excess carrier had no duty to monitor the defense or to anticipate that the defense was being mishandled by the primary carrier and the defense counsel selected by the insured, noting the general tort rule that a party has no duty to anticipate the negligence of another. Id. F. Offer of a Complete Release A split of authority has arisen after Garcia as to whether the demand must include a promise to provide a complete release to the insured. In Birmingham, supra, the court held that a demand from an excess carrier that the primary carrier tender its limits did not satisfy Stowers because it did not propose to release the insured fully. 947 S.W.2d at 599-600 (citing Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 314 (Tex. 1994)). In Trinity Universal Ins. Co. v. Bleeker, 944 S.W.2d 672 (Tex. App.–Corpus Christi 1997), rev’d, 966 S.W.2d 489 (Tex. 1998), the Court of Appeals held that the settlement offer did not need to specifically offer a complete release in conjunction with the demand for policy limits if the letter mentions

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the Stowers doctrine by name. Also, the fact that the settlement demand made no comment regarding how outstanding hospital liens were to be handled did not render the demand ineffective. Id. The Supreme Court disagreed, stating:

As a threshold matter, "a settlement demand must propose to release the insured fully in exchange for a stated sum of money."

Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998). In Bleeker, the offers to settle did not indicate that certain hospital liens would be released as well. Thus, the court held that any implied release was not a full release in the context of that case. Id. at 491. One question left open by Bleeker is whether there is any available method for proving that the offer included a full release. In other words, if the letter did not state as much, then could common practice and understanding or even subjective testimony from the plaintiff’s attorney supply the missing element? The Supreme Court appears to be moving towards greater certainty as to the terms and communication of the terms of Stowers demands. The emerging rule appears to be that Stowers demands are disfavored and thus must strictly and expressly comply with the applicable rules or be found insufficient to invoke the tort remedy of an extra-contractual claim. Thus, like conditions of forfeiture, the Stowers demand is disfavored in part because of its drastic potential consequences. Needless to say, the Bleeker ruling has led to a number of malpractice claims against plaintiff’s counsel based on failed Stowers demands. Another issue that has not been addressed since Bleeker is whether that decision requires a specific reference to liens if there are in fact no liens. Can a carrier attack an otherwise valid Stowers demand where the plaintiff fails to state liens will be released if there are in fact no liens. Similarly, can this issue be raised if the liens are legally ineffective or unenforceable? Since Bleeker, two cases have discussed Bleeker negatively. The first was in Watters v. Guaranty Nat. Ins. Co., 300 Mont. 91 (2000). This Montana case declined to follow the holding in Bleeker. It also involved an automobile accident. The insurer argued that there was no valid settlement offer because there

was not a full release offer. In effect, the insurer defined "settlement offer" to mean an offer within the policy limits in exchange for a full and final release. The Guaranty court concluded that the statutory cause of action at issue there did not include a definition of "settlement." The court held that treating a "settlement offer" as requiring an offer of a full release including liens in effect added words that the legislature did not include in the first instance. The court held that a “settlement” between the two parties was legally possible without executing full and final release of all liability. The second case that discussing and applying Bleeker is Nationwide Mut. Ins. Co. v. Chaney, 2002 WL 31178068 (N.D. Tex. 2002). The claimant tried to rely upon an implied release of lien, urging that she never excluded a release of any pertinent lien. The court hled that absent an offer to fully release that compies with section 55.007(a) of the Texas Property Code, there is no valid Stowers demand. The court found that the letter demand did not expressly or impliedly release the lien. The decision was affirmed by the Fifth Circuit on other grounds. 78 Fed. Appx. 348 (5th Cir. 2003). G. Frank's Casing--A New Strategy for

Policyholders? As noted, the Supreme Court held that an insurer may settle and seek reimbursement from its insured where the insured has made a demand under Stowers that the carrier settle the case within the policy limits. The decision deals with Stowers standards in assessing what the demand from the policyholder really means. Therefore, it is important to our review of general duties under Stowers. The decision, if unchanged on rehearing, could also provide carriers with a strategic alternative to risking a Stowers claim.

1. The Underlying Facts Frank's Casing installed a drilling platform in the Gulf of Mexico that ultimately collapsed. The owner, ARCO, sued Frank's, which had a primary liability insurance policy in the amount of $1 million and an excess through a Lloyd's syndicate for $10 million. The excess underwriters reserved their rights regarding certain coverage issues. Excess Underwriters at Lloyds, London v. Frank's Casing Crew & Rental Tools, 2005 WL 1252321, at *1 (Tex.,

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May 27, 2005) (motion for rehearing granted Jan. 6, 2006). The settlement history of the case includes virtually every approach to handling settlement where significant coverage exists for a large part of the claim:

• Frank's rejected an offer just below the combined limits of the primary and excess limits.

• The excess carrier tried to settle the

portion of the claim involving the excess limits for a separate amount, which was rejected by the claimant ARCO.

• An offer of $8.8 million, $1.2

million below the combined limits of the excess and primary policies, was then made by ARCO.

• The excess underwriters proposed to

Frank's that the excess carrier pay one-third and Frank's two-thirds of the amounts in excess of the primary limits of $1 million, which Frank's rejected.

• In the alternative, the excess

underwriters proposed a flat payment of $5 million of the $7.55 excess amount in return for an agreement to resolve the coverage issues through arbitration, which Frank's also rejected.

• Frank's solicited a new demand

from ARCO, which was made in the amount of $7.5 million.

• Frank's then made a Stowers

demand to the carrier, urging it to settle by accepting the latest offer within policy limits.

• The excess underwriters offered to

front the excess amount above the primary limits if the insured would agree to the underwriters seeking

reimbursement. Id. Frank's would not agree to this proposal.

• The carrier informed the insured

that it would settle the case for the excess amount and intended to seek reimbursement from Frank's if it were determined that the claim was not covered. Id.

• ARCO and Frank's counsel dictated

the settlement into the record in the trial court where the underlying case was being tried.

• Frank's objected that the carrier "did

not preserve its ability to contest 'coverage'" after the dictation of the settlement into the record. (See Concurring opinion of Justice Wainwright at *14.)

• The Settlement Agreement and

Release in the underlying suit was signed by Frank’s and underwriters, and it stated that the releases and covenants in the agreement did not apply to any claims between Frank's and Underwriters. (Id. at *16.)

• The underwriters went forward and

settled, paying $7 million, which was the amount in excess of the then reduced primary limits ($500,000).

Interestingly, the Supreme Court stated that the excess policy required Frank's approval of any settlement. The clause quoted in the court's opinion, in footnote 5, states that the insured must make a claim for any loss it has paid and for which it seeks coverage within twelve months after liability has been fixed by final judgment after actual trial or by written agreement joined by the insured, the claimant and the underwriter. Id. at 2 n. 5. This is certainly not a "consent" clause, at least as most practitioners know them. The settlement agreement with ARCO preserved claims between the underwriters and Frank's. Id. at 2. The underwriters filed suit before execution of the ARCO agreement. The trial court promptly found that there was no coverage, but, based on Matagorda, it

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found that the excess underwriters had no right of reimbursement. Id. The court of appeals somewhat reluctantly affirmed, noting that the case carried "Matagorda County to a logical conclusion that is somewhat disquieting . . . ." Excess Underwriters at Lloyds, London v. Frank's Casing Crew & Rental Tools, 92 S.W.3d 178 (Tex. App.--Houston [14th Dist.], 2002, petition pending). The court suggested this was a matter that had to be taken up with the Texas Supreme Court. The Supreme Court granted the petition for review on January 6, 2006. 2. Scenario One--Stowers Demand--Be Careful

What You Ask For a. Matagorda Rationale--Pushing a Settlement

the Insured Cannot Pay The Frank's Court found that the concern in Matagorda was ameliorated in "at least two situations":

(1) when an insured has demanded that its insurer accept a settlement offer that is within policy limits, or

(2) when an insured expressly agrees

that the settlement offer should be accepted.

In these situations, the insurer has the right to be reimbursed if it has timely asserted its reservation of rights,4 notified the insured that it intends to seek reimbursement, and paid to settle claims that were not covered. Id. (emphasis added). Interestingly, the Frank's Court recognized that in Matagorda refused to allow reimbursement even though the insured had (a) informed the insured in writing that the settlement was reasonable, and (b) stipulated to the reasonableness of the settlement in the subsequent declaratory action on coverage. Id. Does this mean Matagorda reached the wrong result? If not, then is a carrier barred from obtaining reimbursement if the insured admits the settlement is

4 The Court gave no explanation of a circumstance where the reservation would be untimely.

reasonable but does not ask that the offer be accepted? The latter would appear to be the applicable rule in light of the Frank's Court's emphasis on the insured urging actual "acceptance" of the offer, not simply its reasonableness. There would appear to be little difference between these two positions. Moreover, just because an insured urges acceptance of the offer does not mean that the insured is agreeing that it has the financial wherewithal to pay the amount of the settlement if there is no coverage. b. Estoppel?--Transforming the Matagorda

Rationale from Ability to Pay to Reasonableness Based on Liability Exposure

The Court then immediately blends demanding acceptance with reasonableness. The Court stated that when the insured sent a Stowers demand to settle within limits, "it could not thereafter take the position that the settlement offer was reasonable if the insurer bore the cost of settling but unreasonable if the insured ultimately bore the cost." Id. The Court then provides the legal basis for its rule, estoppel:

Once a insured asserts that a settlement offer has triggered a Stowers duty, and the insurer then accepts that settlement offer or a lower one, the insured is estopped from asserting that the settlement is too financially burdensome for the insured to bear if it turns out the claims against the insured are not covered.

Id. This statement appears to be erroneous. An insured making a Stowers demand is merely saying, (a) the claim is covered, and (b) the offer is reasonable (given the liability and damage facts of the underlying case and the fact that it is covered). The insured is not providing a financial statement or admission that it could actually afford such a settlement if it were not insured. This is an estoppel based upon an admission that does not connect with the ultimate deemed conclusion. Just what is admitted by the insured making a Stowers demand? Once again, the Frank's Court blended and ultimately transmogrified the concern in Matagorda as to whether the insured was having a financial burden imposed on it that was beyond its finances. When the Court is finished, the sole concern

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in Matagorda is transformed into whether the underlying settlement was reasonable based on the "'likelihood and degree of the insured's potential exposure to an excess judgment,'" not on whether it has the capacity to pay or not. The Court summarized the rule as follows:

The reasonableness of a settlement offer is not judged by whether the insured has no assets or substantial assets, or whether the limits of insurance coverage greatly exceed the potential damages for which the insured may be liable. It is an objective assessment of the insured's potential liability.

Id. In order to reach this result, the Court also blended competing and different statements of the Stowers standard. The Court noted:

We have said that the duty imposed by Stowers is to "exercise 'that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.'" We have also said that the Stowers duty is viewed from the perspective of an insurer: "the terms of the demand are such that an ordinarily prudent insurer would accept it." Both statements are correct."

Id.(emphasis added). The Court then again explained that the focus of reasonableness was on liability and likely exposure, not the ability to pay. That would appear to be correct, so than how is it the Court concludes that the insured's admitting Stowers applies is an admission that it has the financial wherewithal to settle the case, the real concern expressed in Matagorda? Finally, the Court then admitted that whether the insured could actually afford the settlement for which it demands is simply not a persuasive factor. The Court reasoned:

Insurance coverage should not be created where none exists merely because an insured could not afford to pay a judgment if the case were tried or to fund a settlement demand from an injured party. The insurer should be entitled to settle with the injured party for an amount

the insured has agreed is reasonable and to seek recoupment from the insured if the claims against it were not covered. From the insured's point of view, it is in precisely the same position it would have been in absent [sic] any insurance policy, except that the insurer is now the insured's creditor rather than the injured party.

Id. at *4. The Court missed a very important point. In Matagorda, the Court emphasized that declaratory actions were available prior to resolution of the underlying tort claim. Thus, the carrier did not need a right of reimbursement to avoid the Stowers demand. An early determination of coverage or not thus resulted in the claimant having to realistically appraise the value of an uninsured judgment against the insured. The insured avoided a potentially ruinous reimbursement claim. The Frank's Court wholly ignores the crucial underpinnings of its reasoning in Matagorda. The reality is, of course, that the Court in Matagorda was very, very wrong in assuming that declaratory actions were a true palliative in every case. The courts and parties alike have realized that declaratory actions regarding indemnity are not workable except where it is determined that there is no duty to defend and thus no duty to indemnify. It seldom makes sense to litigate in a declaratory action the "actual facts" involved in the underlying suit before those facts have actually been litigated in that suit. It would be simpler and more persuasive if the Court had admitted its numerous erroneous assumptions in Matagorda and simply started from scratch. The equating of a Stowers test that focuses on the perspective of the "reasonable person in the "exercise and management of his own business" with a test that focuses on whether a "reasonable insurer" would have accepted the offer would appear to be very much in error. Many practitioners in Texas have hotly debated which standard applies, one looking at the reasonable uninsured business-person and one that looks at the reasonable insurer. The latter, some would say, clearly allows consideration of coverage defenses, even if unsuccessful, as part of the mix of factors. Some say the former clearly does not allow such consideration.

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c. Public Policy Benefits of Reimbursement The Frank's Court finally recognized that allowing reimbursement does have positive effects from a public policy standpoint. Settlement is encouraged, especially where coverage is in dispute, thus inuring to the benefit of claimants. Id. The risk of recovery is shifted to the insurer where the insured has insufficient resources to pay for the reimbursement claim. Id. Importantly, the Court reasoned that the two-edged sword of a Stowers demand and resulting extra-contractual liability and disallowing reimbursement forced carriers into a Hobson's choice that created coverage where none existed. The carrier was forced to settle to avoid extra-contractual liability and thus provide coverage that might be found unavailable or risk extra-contractual liability by refusing to settle and then losing the coverage question. Id. (discussing Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106 Cal.Rptr. 535, 22 P.3d 313, 321 (2001)). 3. Scenario No. 2--Express Agreement Offer

Should Be Accepted The Frank's court stated that the primary rationale of Matagorda was the need to ameliorate the concern that a carrier with the unilateral right to settle and seek reimbursement could agree to a settlement that was financially out of the insured's financial ballpark. 2005 WL at *3 In Matagorda, the Frank's Court emphasized, the policy gave the insurer the right to settle without the consent of the insured. Id. The Court distinguished Matagorda as a case where the insured's consent was not required by the policy and in fact was not given. In Frank's, the Court held that the excess carrier could not settle without the consent of the insured. The policy provision cited as requiring "consent to settle" by the insured was nothing more than a form of "no action" clause. Because the excess policy was apparently an "indemnity" policy, this clause set forth the conditions under which the insured could pay and then present a claim to the carrier. The assumption of the clause is that the insured is the one instigating settlement, not the carrier. Indeed, the portions of the policy quoted by the Court indicate that the carrier did not have the duty or right to control defense or settlement of the underlying suit. Is the Court developing a new duty of care regarding settlement

for excess carriers? One also wonders how there ever could have been a valid Stowers demand sufficient to supply all of the admissions necessary to serve as the basis of the estoppel theory of reimbursement discussed. One must ask how a consent to settle requirement makes any difference in addressing the Matagorda concern about an unreasonable settlement being foisted on the insured. If required and the insured consents, the insured has obviously conceded reasonableness. The insured in Matagorda did not have to consent to settle, but it certainly accepted the benefits of settlement. In fact, as noted, the insured stipulated to the reasonableness of the settlement. So why was reimbursement not allowed in that case? Again, Frank's reaches results and uses reasoning that is simply diametrically opposed to Matagorda, making clear again that it is in reality overruling Matagorda ,not merely distinguishing it. Because of the consent requirement read into the contract by the Court, it concluded that the insured had the option of continuing the litigation or consenting to settle. The Court observed:

The insured had control over whether to settle for the sum offered by ARCO or continue the litigation. An insured who agrees to the settlement and benefits by having claims against it extinguished cannot complain that it must reimburse its insurer if the claims against the insured were not covered by the policy.

Id. at *5. These statements are true of any settlement eliminating the insured's liability, regardless of whether the policy requires consent or not. If the insured allows the settlement to go through, it has accepted the benefits and conceded reasonableness. In direct conflict with Matagorda, the Frank's Court finds that a quasi-contractual right of reimbursement is implied in these circumstances. Id. In Matagorda, the Court held that there could be a right of reimbursement only if the insured authorized the settlement and agreed to pay the insurer if the coverage defense prevailed. Id. The Frank's Court openly rejects the Matagorda Court's analysis of three

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out-of-state cases5 and a law review article6 that allegedly supported the written and express agreement requirement. The court found that only one case cited by the Matagorda Court actually upheld a written agreement requirement and that the law review article also did not state that a written agreement was always required. Id. Quoting Matagorda, the Court shows that it expressly required a written agreement as the only circumstance under which reimbursement would be permitted. The Court then stated that any suggestion that Matagorda was limited to one circumstance had to be clarified. Thus, there "are additional circumstances that will give rise to a right of reimbursement. Those include the circumstances in the case presently before us." Id. at *6. 4. Concurring Opinions--Seeds of Conflict Three concurring opinions were issued in Frank's. Note from the outset that two justices, Brister and Johnson, did not participate in the decision. Thus, the opinion had a base majority of five justices. Justice O'Neill joined in Part I and Part II (C) and (D), while Justice Wainwright joined only in Part II (C). Part I is essentially a history of the case and provides no arguments and authorities in support of the Court's conclusion. Part II (C), in which seven members of the Court joined, involves the "second situation in which reimbursement will be permitted," where thee is "a coverage dispute, the insured has expressly agreed the third-party's settlement offer should be accepted, and the insurer has notified the insured that it intends to seek reimbursement." Id. a. Justice Hecht Justice Hecht simply states that he believes that Matagorda was wrongly decided and cannot survive. Id. at *7. Justice Hecht emphasized that neither Matagorda nor Frank's involved a settlement "forced" on the insured; both insureds, he stated, wanted to "'have their cake and eat it too. . . .'" Id. Hecht also noted that a "demand" was not needed to effectuate

5 Medical Malpractice Joint Underwriting Assoc. of Mass. v. Goldberg, 425 Mass. 46, 680 N.E.2d 121 (1997); Mt. Airy Ins. Co. v. Doe Law Firm, 668 So.2d 534 (Ala. 1995); and Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal.App.3d 576, 126 Cal.Rptr. 267 (1975). 6 Jerry, The Insurer's Right to Reimbursement of Defense Costs, 42 ARIZ. L. REV. 13, 70 n. 220 (2000).

the right to reimbursement. As long as the settlement offer made was reasonable, the right should be available. Id. The key is the Stowers threat to the carrier to settle where reasonable, which applies regardless of whether the insured actually demands that the carrier accept the offer. It is open to question after Frank's as to whether the Supreme Court is signaling that there must be a demand by the insured that the carrier settle in order to have the Stowers doctrine apply. In short, Hecht agreed with Justice Wainwright's concurring opinion that an agreement should be implied in fact to allow reimbursement where the carrier has given notice of its desire to settle and seek reimbursement.7 He summarized his view as follows:

An insured should not be allowed to unreasonably withhold consent to settlement to force the insurer to pay a claim and abandon coverage issues at the risk of incurring stiff statutory liabilities. An insurer's right to recoup from its insured the amount paid to settle a claim depends on two things: the reasonableness of settlement, and coverage. That is the essence of today's decision.

Id. at *10. Justice Hecht indicated he believed that carriers were put to a Hobson's choice where reimbursement was unavailable: (1) waive the coverage defenses and settle, or (2) stick to the coverage defenses, refuse to settle based on them, and face a ruinous extra-contractual judgment and resulting statutory and common law claims in the aftermath. Id. at *7. "When insurers are forced to pay doubtful claims, the premiums paid by policyholders who have purchased coverage must be used to satisfy claims against policyholders who have not purchased coverage." Id. at *8. This obviously has a significant detrimental effect on the insurance purchasing public.

7 The problem with an implied in fact agreement based on the reservation of rights is that, prior to Matagorda, insureds would regularly object to any such reservation, which effectively destroyed an implied in fact agreement. Thus, the preferred approach for carriers is a implied in law or quasi-contractual right of reimbursement.

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Justice Hecht dismissed the arguments of Justice O'Neill that the presence of a consent requirement was critical to the availability of a right of reimbursement. Id. Hecht posited what difference a consent requirement could make if the insured in fact consented to the settlement anyway. Id. He also rejected O'Neill's arguments that reasonableness involved consideration of what the case could have settled for if there had been no coverage at all. In other words, the insured's exposure for settlement would somehow be less if there was no coverage versus its exposure under a carrier brokered settlement based upon the claimant's belief that there was or might be coverage. Justice Hecht explained that there were some limits to the extent that he was willing to allow reimbursement. "[N]o one suggests that an insurer may unilaterally settle a claim for an unreasonable amount, or in circumstances that actually (rather than hypothetically) prejudice the insured. Neither the present case nor Matagorda County involved such a situation . . . In the off-chance that such a situation could arise, statutory prohibitions against unfair practices by insurers offer full relief: actual damages, additional damages, and attorneys fees." Id. at *9. b. Justice Wainwright Justice Wainwright stated that the parties in Frank’s "reached an agreement on reimbursement" and that agreement should be enforced. Id. Thus, the remaining portions of the Court's opinion were, in his opinion, unnecessary. Nevertheless, Wainwright stated that the carrier's right of reimbursement flowed from the condition of reimbursement it placed on accepting the offer; the equities of the parties' situations alone would not be enough. Id. at *15. Indeed, he emphasized that making the Stowers demand alone was insufficient to justify a right of reimbursement, noting that threatening to sue does not alter the parties' contract. Id. The core rationale, according to Wainwright, was Frank's' "acquiescence in the settlement . . . ." This action, he reasoned, bound Frank's "under principles of contract law to the condition that Excess Underwriters would be able to seek reimbursement." The facts in this regard that he noted included the demand to act reasonable and accept the settlement before a ruling on contract claims in the underlying suit. Excess Underwriters agreed to do so on the condition that it be allowed reimbursement rights. Frank's did not reject this offer

or counter it. Justice Wainwright stated that Frank's admitted it accepted the conditioned offer, but it still contested reimbursement because there had been no "'clear and unequivocal consent to seek reimbursement.'" Id. at *16. Justice Wainwright indicated that the only way that Frank's could have avoided an agreement implied in fact would have been to refuse the $7.5 million payment and proceeded to trial, or it could have made a counter-offer rejecting the reimbursement condition. Id. at *17. Now, what do you think would have happened if Frank's had made such a counter-offer? Is the carrier still faced with the Stowers dilemma: waive coverage or risk a ruinous award of damages? That is not a solution. Thus, Justice Wainwright's approach falls short of resolving the problem. He does note, however, that the real solution may be in reviewing and revising the Stowers duty/problem itself. Id. at *18. c. Justice O'Neill Justice O'Neill attempted to limit the majority decision strictly to the situation where the insured's consent to settle is required by the policy. Id. at *10. She concluded that a right to reimbursement was implied in law because Frank's consented to the settlement and because the carrier could not have settled without that consent. Id. at *12. Merely expressing agreement to the settlement of the case should not subject an insured to a reimbursement claim, according to O'Neill. Id. The emphasis on consent is apparent. Personal lines policies, i.e. homeowners and personal automobile policies, place the exclusive right to settle with the carrier. Id. Thus, O'Neill apparently is carving an exception that would remove individual homeowners from the specter of reimbursement claims.

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Justice O'Neill correctly pointed out that the focus of the Stowers duties is not a clean fit with reimbursement rights because these doctrine assume the existence of coverage and focus on only reasonableness based on liability exposure. A settlement in the absence of coverage, she reasons, would be far less than one with actual coverage or potential coverage. Id. at *11. Thus, asking for compliance with Stowers also assumes coverage. The insured is saying, O'Neill reasons, that the settlement would be reasonable if there was coverage, not that the amount would be reasonable if there was no coverage. Id. 5. Motion for Rehearing Rehearing has now been granted in Frank's. The actual motion for rehearing filed, as opposed to the amicus briefs, emphasizes that the Court has effectively overruled Matagorda and has failed to address the delicate balance of interests analyzed in that case. (Motion for Rehearing of Frank's Casing at 1-2.) For example, as noted above, Matagorda noted there was no need to imply reimbursement rights through quasi-contract because carriers could avoid the dilemma of Stowers demands where coverage was questionable by seeking a prompt determination of coverage. Despite talking a great deal about expanding the ability of carriers and insureds to determine the duty to indemnify before resolution of the underlying suits, the Supreme Court has recognized only one real instance where that can be done, where there is no duty to defend. In any situation where the actual facts of the underlying claim are involved, the declaratory action presents the chaotic situation of dual discovery in the declaratory and underlying suit and potential injury to the insured's liability situation in that underlying suit. Declaratory actions, in contrast to the suggestions of Frank's, have not been a panacea. The motion for rehearing states that the Court in Frank's adopts the "California reimbursement rule." (Id. at 3.) The primary basis urged is that the Stowers rules are different in the two states. Frank's urges on rehearing that in Texas a carrier can urge that it was reasonable in refusing to settle under the Stowers standard because it had a legitimate coverage defense. (Id. at 4.) The cases cited for this proposition simply do not support this conclusion. See, e.g., Rocor

International Inc. v. Nat'l Union Fire Ins. Co., 77 S.W.3d 253, 262 (Tex. 2002); American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). Additional cites to first-party bad faith cases also provides no support for this position. It is, of course, a rule the court could consider as an alternative to reimbursement in future cases. Frank's is right that California has disallowed "coverage" as an excuse or defense to the Stowers reasonableness standard. This is part of the price for getting reimbursement. It ultimately provides a greater benefit to policyholders because impecunious policyholders against whom reimbursement would be worthless still get to bar the use of coverage defenses as an excuse for failing to settle. Frank's also urges that allowing a settlement demand to create a right of reimbursement will create conflicts of interest requiring independent counsel. One would expect that such a right already existed based on the coverage defenses, depending in part on what the defenses are. (Id. at 8-9.) Frank's then states that defense counsel selected by the insurer could never recommend settlement as reasonable because to do so would harm the interests of its true client, the insured, by creating an extra-contractual right of reimbursement. (Id.) This is a two-edged sword because it would be hard to show the carrier had a duty to settle absent a reasonable offer to settle based on counsel's recommendation. Frank's argues that the insurer will have an incentive to put off getting a coverage determination. This of course ignores the fact that the insured can easily bring a declaratory action itself. Frank's correctly points out that the "Loss Payable" clause cited by the Court as a consent to settle requirement simply does not require consent. Instead, it provides for the factual conditions necessary before the insured may seek to be indemnified for settled or satisfying a judgment against it. (Id. at 11.) Frank's also argues that the reservation or notice of the intent to seek reimbursement was untimely and thus waived. (Id. at 13.) Finally, Frank's disagrees with the Court's determination that the law in Louisiana, potentially

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applicable under choice of law analysis, allows for reimbursement. (Id. at 14-15.) 6. Response to Rehearing Underwriters correctly points out in its response that declaratory actions are not a palliative and that carriers, in order to get the benefit of the rules against assignability in Gandy, must still seek in good faith to get an early determination of coverage. Underwriters also urges that the Stowers standard does not allow a carrier to avoid liability for failing to settle when reasonable if the carrier had a good but unsuccessful coverage defense. (Response at 7.) 7. Post-Decision Amicus Briefs a. TCJL Amicus Brief The business community, excepting of course liability carriers, has had a very negative response to Frank's. The Amicus Brief of the Texas Civil Justice League ("TCJL") urges that Frank's is bad for business. TCJL notes its involvement in returning reason, fairness and predictability to the Texas civil justice system, which has clearly benefited insurers. The TCJL argues that Frank's unfairly tips the balance of fairness in favor of insurers. The TCJL emphasizes that Matagorda has clearly been overturned. It then urges that this require admission of that fact and then proper analysis of the rules of stare decisis. Predictability is lost where precedent is not adhered. (TCJL Amicus at 4.) As recent confirmation hearings involving Judge Alito show, stare decisis, particularly overturning precedent, is a decision that has long-range impact on judges. Not surprisingly, TCJL cites the Court to an article on stare decisis by Chief Justice Jefferson. (Id. at 5, quoting Wallace Jefferson, State Jurisprudence, the Role of the Courts, and the Rule of Law, 8 TEX. REV. L. & POL. 271, 275 (SPRING 2004).) b. Texas Association of Defense Counsel

Amicus Letter In a short letter brief to the Court, the Texas Association of Defense Counsel urges the Court to only allow reimbursement when there is an express agreement. Echoing the motion for rehearing of Frank's, the TADC asserts that reimbursement rights tied to reasonableness of the settlement creates

conflicts for insurance defense counsel. (Letter Brief at 2.) Strangely, this brief argues that a Stowers extra-contractual suit with an assignment of rights against the carrier, including claims for statutory penalties, attorneys fees and punitive damages is preferable to a reimbursement claim between the insured and the carrier, who agree about the need to settle the underlying suit but disagree about whether it is covered or not. c. Amicus of Pilco, Inc. "This decision is not good for business in Texas unless you are in the insurance business" Pilco argues that the right of reimbursement should be a negotiated term in an insurance contract. Unfortunately, Pilco fails to recognize that the need for an implied in law right of reimbursement stems from tort law, Stowers, superimposed under common law doctrine to an existing contractual relationship. Pilco asserts a parade of the horribles for Texas policyholders if reimbursement is allowed as an implied right. Again, Pilco fails to recognize that reimbursement claims had been made in Texas for many years with great frequency prior to the decision in Matagorda. In contrast to Pilco's arguments, reimbursement, appropriately, requires insureds to assess and deal with coverage issues early in the case and appreciate their impact on the litigation. Is it a bad thing that insured's may have to contribute to settlements to avoid reimbursement claims in an effort by both insurer and insured to end the underlying litigation and resolve a coverage dispute? Pilco also asserts that a contract may not be implied in law if an express contract exists. (Pilco Amicus at 9.) The very cases cited in the brief show that there must be an absence of an express contract controlling the circumstances presented. See, e.g., Atlantic Lloyds Ins. Co. v. Butler, 137 S.W.3d 199, 227 (Tex. App.--Houston [1st Dist.] 2004, pet. denied). Pilco correctly points out the absurdity and unsoundness of the Court's estoppel theory as a basis for reimbursement. Pilco notes that estoppel generally requires precise proof of specific elements in order to apply. Normally, estoppel cannot be used to create rights that do not otherwise exist under the terms of the contract.

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d. United Policyholders Amicus The United Policyholder's amicus begins with its usual history of insurance as a risk transfer device intended to insure. No mention is made of the fact that the Frank's case involves an insured trying to avoid having to reimburse over $7 million paid for coverage it did not pay for and did not have. It is hard to develop enormous sympathy for such a potential lagniappe. United Policyholders then turns to the fact that carriers have a duty of good faith that requires them to protect the insured's interests above their own. This amicus fails to note that the Texas Supreme Court has repeatedly held that liability carriers have no duty of good faith to insureds. United Policyholders also trots out some of its repository of insurance industry "history" in order to urge that carriers are "waging a 'war' against policyholders." (UP Amicus at 8.) As "institutional litigants," United Policyholders asserts, carriers have great power to wage war and boast of the vast number of briefs they file. (Id. at 9.) United Policyholders still does not address the fact that all the litigation horsepower in the world does not alter the fact that there is no coverage for the $7 million in settlement payments made in Frank's. United Policyholders appears to assume that insureds are defenseless. This is anything but the case. First, the insured need not wait for the carrier to determine coverage because it can bring a declaratory action against the carrier itself. Second, insureds should be attuned to coverage issues from the moment they receive a reservation of rights letters. Third, if they are concerned about conflicts relating to settlement assessment, they can and should select independent counsel rather than relying on the use of carrier selected counsel. Fourth, if they are concerned about coverage, they can agree to arbitration of the coverage dispute in the midst of the underlying suit. Fifth, if they are concerned about coverage, then they can asses the exposure and seek a compromise with the carrier that fairly allocates the risk of coverage or not. United Policyholders and the other amicus curiae also ignore the facts of Frank's. The carrier tried numerous solutions to the impasse: (1) it would pay a

1/3 share of the settlement (2) it would arbitrate coverage; and (3) it would pay $5 million of the $7.5 million offer. This is hardly the take it or leave it, institutional litigant seeking war, which is the focus of United Policyholder's phantasmagoria. H. Multiple Claimants/Insureds In Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994) (Enoch, J.), the supreme court held:

We conclude that when faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims. Such an approach, we believe, promotes settlement of lawsuits and encourages claimants to make their claims promptly.

A claimant may challenge the reasonableness of settlements made with other claimants. Thus, a carrier entering into unreasonable settlements with other claimants may still be subject to Stowers liability. Unreasonableness depends on traditional factors, such as the merits of the claim. The mere fact that another claim may be more serious does not make the settlement with the lesser claim unreasonable. Id. at 316. The test is whether a reasonably prudent insurer would not have settled the claim "when considering solely the merits of the" settled claim and the "potential liability of its insured on the claim." Id. at 316. The court noted that in any event the claimant would have to show that it would in fact have accepted the actual limits if the other claim had not been settled. Id. at 316 n. 4. The Fifth Circuit applied Soriano to a situation where the carrier settled on behalf of one insured, leaving claims against another insured under the policy. Travelers Ins. Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999). The court held the applicable test is whether the carrier would have settled the particular claim against the particular insured when considering solely the merits of the claim and the potential liability of its insured. Id. at 765 (citing American States Ins. Co. of Texas v. Arnold, 930 S.W.2d 196 (Tex. App.–Dallas 1996, writ

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denied)(suit by excess carrier against primary who left the excess with defense and indemnity of additional insured after settling on behalf of another insured and exhausting limits) and Vitek, Inc. v. Floyd, 51 F.3d 530 (5th Cir. 1995)(involving additional insured barred by bankruptcy court permitting carrier to exhaust limits as to debtor/insured)). The court noted that a policy limits demand had been made as to the insured the carrier settled on behalf of and not the other insured. The court noted that was not addressing the duties of a carrier faced with simultaneous Stowers demands. Id. at 767. In Western Alliance Ins. Co. v. Northern Ins. Co., 176 F.3d 825 (5th Cir. 1999), the court held that where an offer within limits was made as to the named insured before an additional insured was later added to the suit, the carrier would not be protected under Soriano and Citgo when it later settled using the entire policy limits on behalf of the later added named insured. The court found that the facts presented an exhaustion of limits that was predated by a breach of the duty to indemnify. Id. at 828. In fact, the two insurers agreed to settle, with a modest contribution being made by the additional insured secondary carrier; after the named insured was added to the suit, the same carrier, the primary carrier for this named insured, paid its limits to settle as to that insured. When the primary carrier for the additional insured sued the other carrier, the other carrier raised exhaustion of limits as a defense. It should be noted that this was not a true extra-contractual or Stowers case. The carriers agreed to each contribute to settle and then resolve who should pay what. This decision is highly questionable. For one thing, absent Stowers duties being invoked, the carrier was entitled to decide not to settle early in the case. The mere fact an opportunity existed for paying indemnity dollars does not equal a duty to do so. Moreover, both carriers in this case were primary carriers. As long as the carrier settling for its named insured knew that other coverage existed for the other insured under its own policy, one must ask why it should be challenged for protecting an insured with only one policy, not two. In Mid-Century Ins. Co. v. Childs, 15 S.W.3d 187 (Tex. App.–Texarkana 2000, no pet. h.), the court held that the carrier acted properly by settling two claims out of multiple claims for the policy limits. Following Soriano, the court concluded that as long as the

settlement was reasonable, the carrier violated no duty to the insured by resolving claims that would have otherwise resulted in a judgment in excess of policy limits. The court also rejected the holding of the trial court that the failure to get releases from all potential claimants created a conflict of interests and that the carrier had a duty to more fully investigate the remaining claims. III. Practical Suggestions for Drafting Stowers

Demands A. Offer Must Be "Clear and Undisputed"--

So, Put It In Writing No one should bank on the Supreme Court finding that a purely oral Stowers demand is sufficient. While they have suggested that a "formal demand" is not absolutely necessary, the demand's terms "must, at a minimum, be 'clear and undisputed'. . . ." D. Plaut, Stowers Update: New Aspects of An Old Claim, South Texas College of Law--Texas Ins. Law Symposium, I-8 (Jan. 26-27, 2006)(discussing and quoting Rocor). Oral offers are subject to dispute and are rarely likely to be "clear and undisputed." B. Timing or Buying Time Determining when to send the demand requires careful consideration of the reasonableness standard. The carrier needs to have had a reasonable opportunity to ascertain the basic facts impacting the liability and damages exposure in the case. This will thus result in timing be varied based on the nature of the case. Few pre-suit Stowers demands will succeed. Most carriers do not even hire an attorney for the insured until after suit has been filed. The biggest problem for claimants regarding timing is consideration of whether there are multiple claimants and limited limits. Soriano encourages a race to make the Stowers offer. This pits one plaintiff's attorney against another. The "me first" attitude is protective, but dangerous. If there has not been time to adequately asses the financial position of the defendant/insured, settling for low limits could result create malpractice exposure for the plaintiff's counsel.

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One solution is for plaintiffs' counsel to band together early and seek a joint solution. One would expect this would require some form of agreement or consent from the clients as well. This approach assures no one will take the money and run. All concerned can assess the financial condition of the insured and make intelligent choices without a time-crunch. Another solution is to seek to include in the pre-trial scheduling order an agreement or an order barring settlement and exhaustion of funds by a single party. Where coverage issues exist, the trial court can arrange to have such issues decided in a separate declaratory action. The best approach is to confirm any such arrangement with a Rule 11 agreement that is enforceable. Timing can also be affected by pending, important coverage decisions. The pendency of the issue of the insurability of punitive damages is one example. C. Reasonable Time Limits Most plaintiffs believe that short time limits increase the pressure on the carrier. It typically does not. Remember that the time within which the offer can be accepted will be part of the determination of whether the carrier was reasonable in refusing to settle. Thus, the shorter the time provided, the more likely it is that the carrier's position of reasonableness is enhanced. The best philosophy is to "give them as much rope as they want." A basic thirty-day offer is standard. Freely granting extensions is also advisable. If the carrier obtains extensions and then refuses to settle, there are any number of negative implications harmful to their defense of the Stowers suit. Failing to give them the time again potentially gives them an out. D. Definite Identification of Parties The demand letter should clearly identify who is making the offer and to whom it is being made. This author frequently sees demand letters where there is confusion over who is offering and which entities are to be released. Vagueness or confusion in the letter imperils the chances the demand will stick.

Ethical issues obviously exist regarding joint plaintiff offers by a lawyer representing a group of plaintiffs. It is unclear whether a carrier would have the right to challenge the sufficiency of a demand based on ethical considerations.

E. Definite Amount Within Limits It is axiomatic that you have to have the limits correct in order to make a valid demand. It is also a basic consideration to make sure that the demand is for a definite amount within the limits. Making a proper demand on a declining limits policy is particularly tricky. The best approach here would appear to be to ask for a dollar less than the remaining limits, allowing any necessary reduction for additional defense fees that must be paid to finalize settlement. The issue of a proper declining limits offer was presented in part in Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172, 191-93 (Tex. App.--Fort Worth 2004, pet. pending), which is pending on petition for review before the Supreme Court. This type of policy has variously been described as exhausting, wasting, burning or eroding. In short, the costs of defense erode the policy limits. So, the limits are a moving target. In that case, the claimants orally indicated they were seeking "policy limits." A written settlement offer was made for the policy limits of the primary policy: $1 million. The letter added that the excess carrier should be apprised that the case could be settled "at this time, within the limits of the primary policy." Id. at 193. Oral testimony provided by the plaintiffs' counsel indicated he made a demand to settle for the policy limits of the primary policy, which he understood at the time to be $1 million. Id. The limits were actually less than $1 million because of defense cost erosion. While the letter indicated the offer was conditioned on the limits being $1 million, the plaintiffs' counsel testified that no condition was intended. The case subsequently went to mediation, where confusion continued to reign. Again, testimony was presented in the absence of a written document, indicating the offer was to take $1 million or whatever the limits were. Additional testimony showed that the plaintiffs said they would come off $1 million if the defendant would come up to $500,000. The plaintiffs never came down from $1 million. Id. Added to this mess was the expert opinion of Gary Beck, indicating that he thought a Stowers demand had been made. Id. at 195. Similar

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testimony was presented by Rickey Brantley, the ad litem for one of the claimants. Id. The court held that this evidence amounted to more than a scintilla that there was a valid Stowers demand. This reasoning would appear to erroneously shift to the jury the responsibility of considered legal questions. The court also addressed whether the carrier could have settled in light of the fact that the mediation settlement discussions did not involve a communicated consent to settle from the insured. Id. The defense counsel did not get the consent letter until after the mediation. Id. Strangely, the court held that the carrier "failed to conclusively prove that it did not have an opportunity to settle the claim after receiving" the insured's consent. Id. The ruling seems to erroneously presuppose the existence of a valid Stowers offer and a duty to initiate settlement. It should be noted that the case presents a number of additional issues to the Supreme Court that are not apparent on the face of the court of appeals' opinion: (1) whether the settlement offers offered a full release; (2) whether the offers included non-covered items; and (3) whether the offer/s were conditional. (Admiral's Petition for Review, 2005 WL 575475, at *7.) F. Resolve Any Doubts About the Limits

Prior to Making the Offer Any statement in the demand suggesting that it is based on representations or is otherwise conditioned on the correctness of the correct amount of the limits being stated creates a danger that the demand will be treated as conditional and therefore ineffective. The best course is to have binding discovery responses and at least estoppel letters/correspondence establishing the limits before making the offer. Discovery involving the insurer should also be considered where appropriate. In re Dana Corp., 138 S.W.3d 298 (Tex. 2004)(involving discovery of policies and information regarding the status of the remaining limits of liability; discussing in part Tex. R. Civ. P. 192.3(f)). G. Bulk Offers Offers made on behalf of multiple individual plaintiffs can be dangerous where some claims are worth more than limits and some are not. This usually

arises where there is some form of "per person" limit and the offer is conditioned on settlements being effectuated with all claimants. A carrier need not pay more for a weak claim in order to get a settlement as to the stronger claim. As discussed above, in Rosell v. Farmers Texas County Mut. Ins. Co., 642 S.W.2d 278, 279 (Tex. App.–Texarkana 1982, no writ), the carrier refused to accept a bulk offer to settle for two occurrence policy limits where one of the two claims was not, in the carrier's opinion, worth a full single limit. The court held that the carrier did not have to pay more for the weak claim in order to get a settlement of the strong claim. Accord Pullin v. Southern Farm Bureau Cas. Ins. Co., 874 F.2d 1055, 1056 (5th Cir. 1989) (Texas law). Bulk offers for a single limit can actually make the Stowers case much stronger. The insured in such a setting obviously is given a chance of getting much more for the money. The damages exposure to be consideration allows combining all of the exposure reflected in the claims being settled. H. Bifurcated Offers--Excess Carriers and

Insured Contributions One cannot make a bifurcated offer without making a conditional offer. For example, if the offer to the carrier is contingent on the insured kicking in some of its own money, then the offer is conditional. Can it never be a valid Stowers demand? Yes. The Supreme Court certainly suggested in Maldonado that proof that the carrier was informed of the insured's willingness to satisfy the terms of the "condition" would likely be sufficient to trigger the carrier's duty to settle. In that case, of course, the carrier did not receive sufficient notice. One approach to this problem is to make the bifurcated offer in such a fashion that the insured is given a certain amount of time to consider whether it wishes to contribute as requested, and if the insured agrees, it then must notify the carrier, whose own duty will run a specified number of days from the date of the insured's notice to the carrier of its acceptance of the terms. The goal is to make clear that there is in fact a conditional requirement, provide the mechanism for

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its satisfaction and then allow a reasonable time after the condition is satisfied for the carrier to accept. This is intended not fit the rule that even when an offer is conditional, it will be binding when the specified conditions have occurred. Webster, 906 S.W.2d at 77. A similar approach can be taken with excess carriers. In other words, the offer needs to clearly state what is expected from the primary carrier and what is expected from the excess carrier. The mechanism for the satisfaction of the condition that the primary carrier tender limits should be part of the demand. Without a tender, the excess carrier has no duty to settle, generally. For example, the following offer could be made: Plaintiff A and B agree to provide a complete release, including the release of any liens or other encumbrances, for the following consideration: 1. $1 million paid by Slippery Rock Ins. Co.

(primary); 2. $5 million paid by Mondo Excess Ins. Co.

(excess). This offer will remain open to Slippery Rock for thirty days. If Slippery Rock agrees to the tender of the designated amount as part of a total settlement of $6 million, it will then provide notice to the insured and/or Mondo Ins. Co. The offer will then remain open to Mondo to accept this offer for the additional amount of $5 million for a term of 15 days. The thought obviously is that while the offer is initially conditional, the satisfaction of the condition sets the stage for an unconditional offer. The communication and time enlargement provisions seek to solve problems such as those in Maldonado. A similar difficulty exists where there is a self-insured retention or sizeable deductible. A bifurcated offer may be required in such settings, particularly where the coverage above is not invoked until there is a tender or exhaustion of the deductible/SIR. SIR's are troublesome in any event. The insured in control of its own money is often more intransigent regarding settlement than a liability insurer. Currently, Texas law holds that a self-insurer has no Stowers duty to settle.

I. Offer a Full Release, Including Any Liens The most dangerous practice I have seen since the release of Bleeker is the offer of indemnity from any liens. Obviously, most plaintiffs would be a poor source of protection against any significant lienholder. Some plaintiffs' attorneys will offer indemnity themselves, which is slightly better. The indemnity approach is dangerous. The Supreme Court has said a full release must be offered, not some triangular indemnity arrangement. Why take the chance? It is certainly advisable to recite that what is being offered is intended to fully comply with the requirements of Bleeker. This should be used as a "back-up" or additional part of the offer, not the sole offer regarding the release. It should follow an unconditional and unequivocal statement that the offer is to provide full releases, including releases from any liens. J. Consider Whether a Detailed Discussion of the

Case is Warranted The best approach, in this author's opinion, is for all critical information regarding the case to be in the insured's, the defense lawyer's and the carrier's hands as it is developed. The longer it is in the file, the less likely that the carrier can urge that it did not have the time to adequately determine whether to settle. Focusing on key facts and citing to clearly available documents is the most effective approach. Exaggeration and hyperbole will not help, and likely will hurt. Remember, sometimes the best approach may be to hope the carrier will actually pass on the offer and thus open the limits. It does little good to cite to old bad faith/extra-contractual cases. This highlights that you cannot be taken as seriously. This author has seen hundreds of letters citing Allstate v. Kelly, supra, long after the case lost any real significance. Care should be taken to make sure that any factual discussion or argument is not counter to the interests of the insured regarding coverage. Hammering too hard on facts involving alleged malice can move the case in a potentially uncovered direction.

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K. Argue Coverage Argument regarding known coverage issues can be helpful. This can easily be done in separate letters. Carrier handling problems can also be emphasized, along with any problems in the handling of the defense. The main thing to remember is that argument regarding facts o the underlying claim and coverage issues is not required under Stowers. L. If in Doubt, Send It To Defense Counsel Where the insured is represented by counsel, the letter should be directed to the defense counsel for the insured. If the insured has independent or coverage counsel, they should be copied. If you know the identity and contact information for the adjuster, copy them.

With bifurcated offers, you have to make sure that each piece of the offer goes to the affected party. In other words, the offers need to go to the primary carrier and excess carrier or their representatives as well. M. Special Problems Presented Where Risk

Allocation is Involved Cases layered with multiple policies covering the same insured, and the resolution of the allocation or coordination of benefits, can be a devilish problem for the plaintiffs counsel trying to make a Stowers demand. The layering approach suggested above as to bifurcated claims is more difficult where it is entirely unclear which policies and in what order will go first, second, etc. The best example of this problem area is asbestos or long-tail injury cases. Because the insured "picks-the-line" of coverage under APIE v. Garcia, supra, an offer specifying anything other than the amount could prove as troublesome as making a contingent or conditional offer.

In Willcox v. American Home Assurance Co., 900 F. Supp..850 S.D. Tex. 1995), the offer was conditioned on payment by two insurers whose policies could not be stacked. In addition to exceeding the correct limits, the offer was found to be conditional. Moreover, the court found the offer was also conditional in that it stated that it was for the amount stated unless the insured could demonstrate the limits were less, in which case the demand was automatically amended to equal that lesser amount. Id. at 858. The court found this violated the conditional offer rule expressed in Webster, supra. N. Consent to Settle Absent a policy provision requiring the consent of the insured, a carrier does not have to have the consent of the insured in order to settle. Dear v. Scottsdale, supra. Consent is required in a large number of professional liability policies. Obviously, a Stowers demand on an insured with such a policy will depend on whether this condition to the duty to settle has been satisfied. In other words, if the insured does not "tee up the carrier," no one else can. Obviously, care must be taken to get the insured's attention long prior to the demand letter. The demand letter, however, can point out in detail all of the problems facing the insured if the settlement offer is not accepted and the carrier refuses to settle. In other words, a road map to what is likely in the insured's best interests may prove helpful. O. Mediation? The mediation privilege makes many nervous about making offer in that setting. There is also a great deal of debate about whether to make a limits demand before or after the mediation. No hard a fast rule applies, except that any attempt to Stowerize the insurer should be made in writing, even in a mediation setting.