Opinion ID: 2099901
Heading Depth: 3
Heading Rank: 1

Heading: Reasonably Clear Liability

Text: Neither the Insurance Code, nor the rules or regulations the Board has adopted thereunder, articulate when liability has become reasonably clear for purposes of triggering the insurer's duty to reasonably attempt settlement under the statute. National Union claims that, by failing to define a standard, the Legislature must have intended the common-law Stowers standard to apply. There is nothing to indicate that the Legislature had in mind any standard other than the familiar Stowers standard, and certainly there was merit to unifying the common-law and statutory standards in this context. See Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 55 (Tex.1997). Applying the familiar common-law standard promotes uniformity and prevents insurers from facing conflicting liability standards for failing to settle lawsuits filed by injured third-party claimants. See id. Stowers has long defined an insurer's duty to its insured in attempting to settle third-party liability claims. Stowers, 15 S.W.2d at 547-48. While this case does not fit neatly within the Stowers paradigm because the insurer ultimately settled within policy limits, we believe that Stowers provides an appropriate framework for understanding and applying the statutory standard. Under the common law, an insurer generally has no obligation to settle a third-party claim against its insured unless the claim is covered under the policy. See Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex.1997). Nor is an insurer obligated to indemnify its insured for a third-party claim on which the insured is not liable. Cf. Linkenhoger v. American Fidelity & Cas. Co., 152 Tex. 534, 260 S.W.2d 884, 887 (1953) (holding that insured's Stowers claim against insurer did not accrue until insured's liability was finally adjudicated), overruled in part on other grounds by Street v. Second Court of Appeals, 756 S.W.2d 299 (Tex. 1988), Hernandez v. Great Am. Ins. Co. of N.Y., 464 S.W.2d 91 (Tex.1971). These well-established common-law precepts, which reflect the parties' expectations in contracting for insurance, inform our determination of the scope of the duty the Legislature imposed. Accordingly, we hold that to trigger an insurer's statutory duty to reasonably attempt settlement of a third-party claim against its insured, the policy must cover the claim and the insured's liability to the third party must be reasonably clear. In this case, National Union does not dispute coverage under the policy, nor does it claim that Rocor's liability was not reasonably clear. Thus, these two elements of Rocor's statutory claim are satisfied. But National Union maintains that these elements alone are not enough to trigger an insurer's obligation to reasonably attempt settlement. It claims that the insured must also show that the plaintiffs made a proper settlement demand within policy limits that an ordinarily prudent insurer would have accepted. In some jurisdictions, an insurer that has had a reasonable opportunity to determine that its insured is liable on a covered claim may incur tort liability for failing to settle even if the third-party claimant has not made a firm settlement offer. See, e.g., City of Hobbs v. Hartford Fire Ins. Co., 162 F.3d 576, 586 (10th Cir.1998) (applying New Mexico law); First State Ins. Co. v. Utica Mut. Ins. Co., 870 F.Supp. 1168, 1176 (D.Mass.1994) (applying Massachusetts law); Maine Bonding & Cas. Co. v. Centennial Ins. Co., 298 Or. 514, 693 P.2d 1296, 1303 (1985); Alt v. American Family Mut. Ins. Co., 71 Wis.2d 340, 237 N.W.2d 706, 711-12 (1976); Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 323 A.2d 495, 505-07 (1974); State Auto. Ins. Co. of Columbus, Ohio v. Rowland, 221 Tenn. 421, 427 S.W.2d 30, 35 (1968). These jurisdictions generally reason that the lack of a firm settlement offer is merely evidence that a jury may consider in deciding the insurer's liability, and does not preclude a tort claim against the insurer. Rova Farms, 323 A.2d at 505; see also Rowland, 427 S.W.2d at 35. But in Texas, the common law imposes no duty on an insurer to accept a settlement demand in excess of policy limits or to make or solicit settlement proposals. See Garcia, 876 S.W.2d at 849, 851. As we noted in Garcia, [r]equiring the claimant to make settlement demands tends to encourage earlier settlements. Id. at 851 n. 18. A converse rule, we concluded, would discourage early dispute resolution by effectively requir[ing] the insurer to bid against itself. Id. at 851. Consequently, an insurer's settlement duty is not activated until a settlement demand within policy limits is made, and the terms of the demand are such that an ordinarily prudent insurer would accept it. See id. at 849. We see no reason why an insurer's duty to its insured under article 21.21 should not be similarly circumscribed. Accordingly, we hold that an insurer's statutory duty to reasonably attempt settlement of a third-party claim against its insured is not triggered until the claimant has presented the insurer with a proper settlement demand within policy limits that an ordinarily prudent insurer would have accepted. See id. A proper settlement demand generally must propose to release the insured fully in exchange for a stated sum, although it may substitute the policy limits for that amount. See id. at 848-49. At a minimum, the settlement demand must clearly state a sum certain and propose to fully release the insured. See id. at 849. The dissent seems to take the position that liability is reasonably clear under the statute if the insured clearly caused the third party's injuries. But under that view of the statute, an insurer could be held liable for failing to settle even if the amount of the injured third party's damages were unknown or unclear. And our view of the statute is consistent with the statutory purpose the dissent identifies, because it is expressly intended to encourage swifter dispute resolution. See Garcia, 876 S.W.2d at 851 & n. 18. In sum, we hold that an insurer's liability is not reasonably clear, and liability may not be imposed under article 21.21, unless the insured shows that (1) the policy covers the claim, (2) the insured's liability is reasonably clear, (3) the claimant has made a proper settlement demand within policy limits, and (4) the demand's terms are such that an ordinarily prudent insurer would accept it. These elements comprise the statutory liability standard against which to measure legal sufficiency.