Guide for Causes of Action for Bad Faith Claims

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Last Updated
July 20, 2021

Tex. Ins. Code § 542 and Common Law:

Under the Texas Unfair Claims Settlement Practices Act, an insurer cannot engage in unfair claim settlement practices which include “ . . . (4) not attempting in good faith to effect a prompt, fair, and equitable settlement of a claim submitted in which liability has become reasonably clear.”[1] Tex. Ins. Code § 541.151 creates a cause of action against those who engage in unfair or deceptive insurance practices.

C. Stowers Doctrine 

In Texas, the duty of an insurer to accept reasonable settlement demand is known as the “Stowers duty”. The Stowers duty is the only common law tort duty that an insurer owes its insured when handling a third-party claim. Texas predicated the duty to settle on the control given to and exercised by the carrier under to the policy terms to control the litigation.[2] The elements for proving an insurer’s breach of a Stowers duty are as follows: (1)A claim against the insured is within the scope of coverage; (2) The demand is within policy limits; The terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.[3] The Fifth Circuit noted that the previous three elements must be met to activate a Stowers duty and that  a demand must also offer to release fully the insured in exchange for a sum equal to or less than the policy limits.[4] In Texas, an insurer has no duty to initiate or make settlement offers absent a valid Stowers demand.[5] A Stowers claim is not a ‘bad faith’ claim.[6]

In assessing likelihood of liability and degree of exposure, the Garcia Court held that the terms of the demand must be such that an ordinary prudent insurer would accept it and that the assessment of reasonableness incudes as a key factor consideration of the likelihood and degree of the insured’s potential exposure to an excess judgment.[7] Factors in considering reasonableness include: (1) that the terms of the settlement were clear and undisputed;[8] (2)that the offer of settlement was written;[9] (3)that the offer of settlement was unconditional;[10] (4)whether all insureds are released;[11] and(5) that time limits to respond to the offer of settlement was provided.[12]

An error of judgment is not a failure to use ordinary care that dictates liability.[13] Only due care is required of the insurer, and the insurer does not become liable to an insured merely because a decision to reject an offer proves to be wrong.[14]

Although there have been many challenges to Stowers over the years, the Texas Supreme Court have affirmed the holding and only made two clarifications. In Tex. Farmers Inc. Co. v. Soriano, the Texas Supreme Court held that when an insurer is faced with multiple claimants under the same policy the adjuster must evaluate each demand independently and can settle one to the detriment of the others.[15] This creates a first come, first serve problem between plaintiffs. Also, in Trinity University Ins. Co. v. Bleeker, one must either resolve liens, or agree to resolve the liens out of the settlement proceeds and allow the insurance company to pay them direct from the proceeds, once proof of acceptance of some amount less than the policy limits is acquired by the Plaintiff and provided.[16]


[1] Tex. Ins. Code Ann. 542.003(4).

[2] G.A. Stowers Furniture Co v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holding approved).

[3] Rocor Int'l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 77 S.W. 3d 253, 261 (Tex. 2002).

[4] Am. Phys. Ins. Exch. V. Garcia, 876 S.W.2d 842, 848-49 (Tex. 1994).

[5] Garcia,876 S.W.2s at 849.

[6] Maryland Ins. Co. v. Head Indus. Coatings and Services, Inc., 938 S.W.2d 27,28 (Tex.1996); Garcia, 876 S.W.2d at 847; cf. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167–68 (Tex.1987) (recognizing an insurer's duty to deal fairly and in good faith with its insured).

[7] Id.

[8] Rocor,77 S.W.3d 253.

[9] Id.(noting that a formal settlement demand was not absolutely necessary to hold the insurer liable, although it is the better course as settlement terms must be clear and undisputed).

[10] Jones v. Highway Ins. Underwriters, 253 S.W.2d 1018, 1022 (Text. Civ. App. –Galveston 1952, writ ref’d n.r.e.).

[11] Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998).

[12] Bramlett v. Medical Protective Co., 2013 U.S. Dist. LEXIS 31044 (N.D. Tex. Mar. 5,2013) (noting that “there may be cases in which an insurer has so little time to respond to a Stowers demand that no reasonable jury could find that it failed to act as a reasonably prudent insurer by rejecting the demand.”).

[13] Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, 215 S.W.2d 904, 928(Tex. Civ. App. – Beaumont 1948).

[14] Id.

[15] 881S.W.2d 312 (Tex. 1994) (“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.”).

[16] 996S.W.2d at 491.

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