AGLIC v. ACE: Anatomy of a Stowers Breach

Most states have a legal doctrine that incentivizes primary insurers to accept settlement demands by saddling them with extra contractual liability if they unreasonably reject a within limits demand. In Texas, it is called a Stowers duty. Texas law on Stowers often focuses on the necessary elements to trigger the duty. For example, the settlement demand cannot be conditional. In AGLIC v. ACE the 5th Cir. makes an Erie guess that the Texas Supreme Court would find the unconditionality requirement satisfied even where a court might have had to approve a settlement that involved a minor child. There were other issues that the court did not discuss that inspired me to write an article recently published in the Journal of Texas Insurance Law. AGLIC v. ACE: Anatomy of a Stowers Breach, Journal of Texas Ins. Law, Vol 19, No. 1, pp. 10-19 (Spring/Summer 2021).

All failure to settle cases involve a bit of Monday morning quarterbacking. If an insured only has a 1% chance of winning at trial and damages will definitely be well above limits and the insurer rejects a limits settlement demand, it is being unreasonable. But if it wins at trial, there is no subsequent lawsuit. The only cases where an insurer’s reasonableness is judicially scrutinized is when there has been a verdict in excess of limits in a case the insurer could have settled. Exactly what is reasonable is contextual as the facts and holdings in ACE v AGLIC demonstrate. In my article I discuss national reasonable tests, the recent Restatements, Texas law and a little math and psychology.

AGLIC v. ACE was an equitable contribution action brought by the excess insurer. Spoiler alert: the excess carrier wins and can recover the amounts it paid to settle from the primary insurer because that carrier breached its Stowers duty. My article notes that the courts focused exclusively on the primary carrier’s conduct. From a psychology perspective the Court found that ACE failed to overcome the status quo bias by not adapting to changing circumstances. In doing so, the district court determined that earlier in the case ACE reasonably rejected a limits demand because it was a defensible case. The plaintiff then made a high-low demand and there is some evidence that an AGLIC, the excess carrier, refused to contribute. After some very pro-plaintiff rulings the plaintiff again reiterated its limits demand. The 5th Circuit affirmed that ACE violated Stowers in rejecting that demand and was liable for the full amount that AGLIC paid to settle the case.

In the article I present hypotheticals to demonstrate that AGLIC arguably made similar decisions as ACE when it rejected the plaintiff’s high-low demand. AGLIC was lucky that it was able to settle without the involvement of a second excess carrier and that the plaintiff ultimately reiterated its limits demand. While ACE v. AGLIC is correctly cited for the risks a primary carrier faces in rejecting settlement demands, my article notes that the outcome could have been different under slightly different facts.

Finally, in discussing whether ACE acted reasonably the Court did not explicitly discuss the proper standard. My article discusses two national standards: the Disregard the Limits and the Equal Considerations tests. I suggest that the different rulings in AGLIC v. ACE underscores that Texas invokes both tests (albeit not by name) in different contexts, which creates uncertainty for parties. These cases (in Texas and elsewhere) present risks to all parties and as a mediator I try to assist parties in fully considering them. Click here to read the Article.