Court Opinion

ID: 4680795
Source: CourtListenerOpinion
Date Created: 2021-04-26 07:14:22.887565+00
Date Added: 2024-06-11T08:03:57.326279
License: Public Domain

IN THE SUPREME COURT OF TEXAS
                                         ══════════
                                           No. 19-0701
                                         ══════════

     IN RE FARMERS TEXAS COUNTY MUTUAL INSURANCE COMPANY, RELATOR

            ══════════════════════════════════════════
                      ON PETITION FOR WRIT OF MANDAMUS
            ══════════════════════════════════════════

                                   Argued September 17, 2020

       JUSTICE BUSBY delivered the opinion of the Court in which JUSTICE GUZMAN, JUSTICE
LEHRMANN, JUSTICE DEVINE, JUSTICE BLAND, and JUSTICE HUDDLE joined, and in which CHIEF
JUSTICE HECHT, JUSTICE BOYD, and JUSTICE BLACKLOCK joined as to Parts I and II.

       CHIEF JUSTICE HECHT filed an opinion dissenting in part, in which JUSTICE BOYD and
JUSTICE BLACKLOCK joined.

       These mandamus petitions, which challenge rulings on a Rule 91a motion to dismiss,

require us to examine the legal basis of claims against a liability insurer that solicited its insured

to fund part of a settlement. According to the petition, the insurer chose to settle claims against

its insured within policy limits but obtained a release that was contingent on the insured paying

$100,000 of the $350,000 settlement. The insured paid and filed this suit for reimbursement,

which the insurer seeks to dismiss on the ground that the insured’s claims for negligent failure to

settle and for breach of contract have no basis in law.

       We agree with the insurer that the insured has no Stowers claim for negligent failure to

settle because there was no judgment or settlement in excess of policy limits. But the insured

can pursue her claim that the insurer breached its obligation to indemnify her for amounts she

was legally responsible to pay under the settlement.         The insurer does not assert that the
settlement was unauthorized, but whether the insured can succeed on her claim may depend on

other issues including coverage and the reasonableness of the settlement amount.             We

conditionally grant mandamus relief accordingly.

                                          BACKGROUND

       Gary Gibson sued Cassandra Longoria for damages he sustained in an automobile

accident when Longoria rear-ended his vehicle. Longoria had purchased liability insurance from

Farmers Texas County Mutual Insurance Company, which provided an attorney to represent her.

Gibson alleged that Longoria’s negligence caused him serious bodily injury and sought damages

of $1 million, which was more than Longoria’s $500,000 policy limit. Gibson designated

experts, but Longoria alleges that the attorney representing her failed to designate an expert by

the deadline, and the trial court denied a motion to make a late expert designation.

       Two months before trial, Gibson and Longoria attended mediation. Longoria, concerned

about her potential liability for damages above her policy limits, brought her own attorney with

her. The mediator proposed that the case settle for $350,000. After mediation, Gibson notified

Farmers that he would accept the mediator’s proposal.           Farmers made a counteroffer of

$250,000. According to Longoria’s petition, Farmers “suggested” or “ma[de] a demand” that

she “contribute the additional $100,000 necessary to secure a release.” Farmers also stated that

Longoria had “created potential liability for gross negligence” even though that claim “had not

been asserted by Gibson.” Gibson rejected Farmers’ $250,000 settlement offer and withdrew his

own settlement offer, advising that he would now seek $2 million in damages.

       Before trial, Longoria’s personal counsel reopened settlement negotiations. Gibson again

agreed to settle for $350,000. After Farmers again refused to contribute more than $250,000,

                                                 2
Longoria offered to pay the additional $100,000 without waiving her right to seek recovery of

that payment from Farmers. Gibson accepted and gave Longoria a release in exchange for

Farmers’ and Longoria’s payments.

       Longoria then filed this suit against Farmers for negligent failure to settle, asserting that

Farmers “failed to act as a reasonably prudent insurer” and as a result she had to pay $100,000 of

her own funds to secure a release from Gibson. Farmers responded with a motion to dismiss

under Texas Rule of Civil Procedure 91a on the ground that Longoria’s claim had no basis in

law. Farmers argued that Texas law does not recognize a cause of action for negligent failure to

settle—a Stowers claim—when there has not been a judgment against the insured exceeding

policy limits.

       Longoria amended her petition to add claims for breach of contract, alleging that Farmers

breached the policy by: failing to defend the suit by timely designating expert witnesses, failing

to accept an offer to settle within policy limits, failing to use its coverage to secure a release,

withholding $100,000 in coverage that it had a duty to pay, and demanding that Longoria

contribute personal funds to settle a potential claim of gross negligence that had not been raised.

Farmers filed another motion to dismiss, asserting that Longoria had no cause of action for

breach of contract for the following reasons: Farmers had no contractual duty to pay damages

because Longoria had not been held legally responsible for any damages, Farmers had a right

under the policy to settle or defend “as we consider appropriate,” and its only duty to settle was

the extra-contractual Stowers duty. The trial court denied both motions to dismiss.

       Farmers sought mandamus relief in the court of appeals, arguing that the trial court

abused its discretion by denying the motions to dismiss. 604 S.W.3d 421 (Tex. App.—San

                                                3
Antonio 2019). The court of appeals agreed as to Longoria’s claim for breach of contract. Id. at

428. Regarding Longoria’s allegation that Farmers failed to timely designate experts, the court

reasoned that it had had no basis in fact because she did not allege any damages as a result of the

alleged breach. Id. at 427. Turning to Longoria’s allegation regarding Farmers’ failure to pay

the settlement, the court concluded it had no basis in law because Farmers fulfilled its contractual

obligation to “settle or defend” by electing to settle. Id.

       A majority of the court of appeals held, however, that the trial court properly denied

Farmers’ motion to dismiss Longoria’s claim for negligent failure to settle. Id. at 429. Farmers

argued that Longoria could not assert a Stowers claim absent a judgment in excess of policy

limits. But the majority held that whether a Stowers claim always required an excess judgment

was not so clearly established as to be free from doubt. Id. at 428.

       Both Farmers and Longoria seek mandamus relief in this Court. The parties disagree

regarding whether Longoria’s claims for negligent failure to settle and breach of contract have a

basis in law.

                                              ANALYSIS

       We explained over 25 years ago that it is “troubl[ing] for obvious reasons” when a

liability insurer “solicit[s] a contribution to [a] settlement from its insured without committing its

own policy limits.” Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 850 n.15 (Tex. 1994).

Early in the last century, “the first qualifications to what had been unlimited insurer discretion to

settle tort litigation came in situations where the insurance company bargained strategically with

its insured . . . [,] us[ing] the risk of excess liability to coerce [the] insured to contribute to a

                                                   4
settlement within the [policy] limits and below the expected [amount of a] judgment [against the

insured].” Kent D. Syverud, The Duty to Settle, 76 VA. L. REV. 1113, 1153 (1990).

       As courts recognized various legal theories to limit this strategic behavior, many

insurance companies “chose[] simply to get out of the game [of suggesting contributions by their

insureds] altogether,” id. at 1156, but Longoria alleges that Farmers engaged in such behavior

here. In reviewing Farmers’ Rule 91a motion to dismiss, we must decide whether this alleged

behavior fits into certain of the modern doctrinal pigeonholes of Texas insurance law:

specifically, whether an insured who contributes to a within-limits settlement in response to a

solicitation or demand by her insurer can bring a claim for reimbursement under Stowers or the

insurance policy.

I.     Standard of review

       Under Rule 91a, a party may move for dismissal on the ground that a cause of action has

no basis in law. “A cause of action has no basis in law if the allegations, taken as true, together

with inferences reasonably drawn from them, do not entitle the claimant to the relief sought.”

TEX. R. CIV. P. 91a.1. In ruling on a Rule 91a motion to dismiss, a court may not consider

evidence but “must decide the motion based solely on the pleading of the cause of action,

together with any [permitted] pleading exhibits.” TEX. R. CIV. P. 91a.6. We review the merits of

a Rule 91a ruling de novo; whether a defendant is entitled to dismissal under the facts alleged is

a legal question. City of Dallas v. Sanchez, 494 S.W.3d 722, 724 (Tex. 2016) (per curiam).

Mandamus relief is appropriate when the trial court abuses its discretion in denying a Rule 91a

motion to dismiss. See In re Essex Ins. Co., 450 S.W.3d 524, 528 (Tex. 2014).

                                                5
II.    Longoria has no Stowers claim against Farmers for negligent failure to settle
       because her liability did not exceed policy limits.

       Longoria’s first claim against Farmers is a Stowers action for negligent failure to settle,

and she contends that Farmers failed to act as a reasonably prudent insurer would have done. In

particular, she alleges that Farmers owed her a duty to accept a reasonable settlement offer

within policy limits, that Gibson’s offer to settle for $350,000 was reasonable especially

considering Farmers’ failure to designate an expert, and that Farmers’ failure to pay that amount

in full was a breach of its duty. Farmers moved to dismiss this claim, arguing that a cause of

action for negligent failure to settle exists only if the insurer’s failure results in a judgment

against the insured in excess of policy limits, which did not occur here.

       Under the Stowers doctrine, an insurer has a common-law duty to settle third-party claims

against its insureds when it is reasonably prudent to do so. Phillips v. Bramlett, 288 S.W.3d 876,

879 (Tex. 2009) (citing G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex.

Comm’n App. 1929, holding approved)). The duty arises when (1) the third party’s claim

against the insured is within the scope of coverage; (2) the settlement demand is within policy

limits; and (3) 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.” Id. (citing Garcia, 876 S.W.2d at 849).

       When these conditions are met and “the insurer’s negligent failure to settle results in an

excess judgment against the insured, the insurer is liable under the Stowers Doctrine for the

entire amount of the judgment, including that part exceeding the insured’s policy limits.” Id.

(emphasis added) (citing G.A. Stowers Furniture Co., 15 S.W.2d at 548). We have consistently

recognized the requirement that an insured be liable in excess of policy limits—whether as a

                                                 6
result of judgment or settlement—in order to bring a Stowers claim. See, e.g., Am. Centennial

Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 481 (Tex. 1992) (allowing excess insurance carrier

to assert Stowers claim against primary carrier where insured’s liability was result of settlement);

Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 829 (Tex. 1990) (noting that the injury-

producing event in determining when a Stowers claim accrues is the “underlying judgment in

excess of policy limits”) (emphasis added).

       We decline to extend Stowers to cases in which there is no liability in excess of policy

limits. We explained in Stowers that an insurer, when defending its insured, acts as the insured’s

agent and is bound to exercise ordinary care to protect the insured’s interests. 15 S.W.2d at 547.

But in cases where there is a substantial risk that the insured’s liability will exceed policy limits,

a conflict may arise between the insurer and the insured. Phillips, 288 S.W.3d at 881; see Canal

Ins. Co., 843 S.W.2d at 484 (opinion of Doggett, J.) (noting that the varying interests of the

insured and the insurer can produce “complex and often conflicting relationships”). In such

cases, an insurer may refrain from accepting a reasonable settlement offer under the assumption

that any adverse judgment will exhaust policy limits and expose only the insured’s money to

risk. Phillips, 288 S.W.3d at 881.

       Permitting a Stowers cause of action eliminates this potential conflict, encouraging

prompt and reasonable settlements. Id. But we see no reason to extend Stowers to impose

potential extra-contractual damages on an insurer in cases where an insured has no liability in

excess of policy limits. See Garcia, 876 S.W.2d at 849 (describing the Stowers remedy as

“shifting the risk of an excess judgment onto the insurer”). In such cases, the contract between

the insured and insurer sets out the carrier’s obligations and protects the insured.              See

                                                  7
RESTATEMENT      OF THE    LAW    OF   LIABILITY INSURANCE § 24 cmt. b (2019) (explaining that

insurer’s contractual liability for damages within policy limits provides incentive for insurer to

make reasonable settlement decisions).

        Longoria points out that an excess judgment is not a necessary element of a Stowers

claim, as we allowed recovery based on an excess settlement in Canal. See Canal, 843 S.W.2d

480. But Canal does not undermine the principle that liability in excess of policy limits is

necessary. In that case, General Rent–A–Car was sued after a tire blew out on one of its cars.

Id. at 481. General was insured by three insurers: Canal provided primary coverage up to

$100,000, and First State and American Centennial provided excess coverage.                      Id.   Canal

investigated and defended the suit, and the carriers eventually settled for $3.7 million. Id. The

excess carriers sued Canal, alleging that it mishandled the claim. Id. We considered whether an

excess carrier was equitably subrogated to its insured’s rights against a primary carrier for

negligently settling the claim. Id. at 482. We held that an excess carrier did have such equitable

subrogation rights, permitting that carrier to maintain the insured’s cause of action against the

primary carrier. Id. at 485 (Hecht, J., concurring). 1 We noted that “[i]f the excess carrier had no

remedy, the primary insurer would have less incentive to settle within the policy limits.” Id. at

483 (Opinion of Doggett, J.).

        Our holding in Canal—that an excess carrier may sue a primary carrier that negligently

settles for more than policy limits—is consistent with Stowers’ goal of encouraging prompt and

reasonable settlements within policy limits. See Phillips, 288 S.W.3d at 881. When a claim

1
  Then-Justice Hecht’s concurring opinion in Canal provides the majority rationale for our decision because it
received five votes, while Justice Doggett’s opinion received four votes. See 843 S.W.2d at 485.

                                                      8
settles within policy limits, however, Stowers liability is not needed to resolve a conflict between

insured and insurer. The insurance contract fully addresses the parties’ common-law obligations

in that circumstance.

       In sum, our precedent has consistently recognized a Stowers cause of action only when

the insured’s liability exceeds policy limits. Longoria’s claim for Farmers’ negligent failure to

settle within policy limits has no basis in law because her “allegations, taken as true, . . . do not

entitle [her] to the relief sought” under Stowers. See TEX. R. CIV. P. 91a.1. We hold the trial

court abused its discretion by denying Farmers’ motion to dismiss that claim.

III.   Longoria has not alleged a viable claim for breach of Farmers’ contractual
       obligation to defend, but she has alleged a breach of its indemnity obligation.

       Turning to the insurance policy, Longoria alleges two principal breaches by Farmers:

(1) Farmers breached its obligation to defend Longoria against Gibson’s suit by failing to

designate expert witnesses on time; and (2) Farmers breached its obligation to pay a settlement

within policy limits when it chose to settle without exhausting coverage or securing a release for

Longoria, demanding instead that she contribute personal funds to the settlement because she

was potentially liable for an uncovered claim. Longoria seeks the same damages for both

breaches: reimbursement of the $100,000 she contributed to the settlement, which she

characterizes as “withheld coverage.”

       In its motion to dismiss, Farmers contended that Longoria’s claims for breach of contract

have no basis in law given the following policy language:

       We will pay damages for bodily injury or property damage for which any covered
       person becomes legally responsible because of an auto accident. . . . We will
       settle or defend, as we consider appropriate, any claim or suit asking for these
       damages. . . . Our duty to settle or defend ends when our limit of liability for this
       coverage has been exhausted.

                                                 9
Farmers advances several arguments in support of this position, and we consider those arguments

as they apply to each of the alleged breaches. 2

         A.       Breach of obligation to defend the suit

         We begin with Longoria’s allegation that Farmers breached its obligation to defend her.

Farmers responds that the policy gave it the right to defend “as we consider appropriate,” and it

points to the lack of any allegation that it failed to defend Longoria as it considered appropriate.

         The contractual right of an insurer to conduct the required defense includes the authority

to select an attorney and “make other decisions that would normally be vested in the insured as

the named party in the case.” North Cty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex.

2004). This contractual right of control means that an insured generally cannot second-guess the

insurer’s decisions. Id. at 689. But we have also held that the right is not absolute, and we have

recognized standards for determining whether the obligation to defend has been breached. Id.

(“Under certain circumstances, however, an insurer may not insist upon its contractual right to

control the defense.”). In Davalos, we provided several examples of how an insurer can breach

its duty to defend, thereby allowing the insured to refuse the insurer’s offered defense and seek

damages. 140 S.W.3d at 689 (citing 1 ALLAN D. WINDT, INSURANCE CLAIMS                               AND   DISPUTES

§ 4.25 at 393 (4th ed. 2001)).

         Longoria has not shown that the defensive defect she alleges here falls within any of the

circumstances we identified as actionable in Davalos. Longoria seeks to hold Farmers liable

because the attorney it provided for her failed to secure and timely designate experts to testify in

2
 Longoria quoted this policy language in her petition, so the trial court could consider it in ruling on Farmers’ Rule
91a motion.

                                                         10
her favor on the issues of causation and amount of damages. We have held, however, that

ordinarily “a liability insurer is not vicariously responsible for the conduct of an independent

attorney it selects to defend an insured.” State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d

625, 628 (Tex. 1998). Longoria identifies no pleaded facts that would take her claim outside this

legal rule. Longoria’s claim that Farmers breached the policy based on counsel’s conduct

therefore has no basis in law.

       B.      Breach of indemnity obligation

       Longoria also alleges that Farmers breached its contractual obligations regarding

indemnity and settlement. Some of her allegations echo her Stowers claim: Farmers failed to

accept an offer to settle within policy limits, subjecting her to the risk of an excess verdict. But

other allegations focus on Farmers withholding payment for a covered loss: Farmers failed to use

its coverage to secure a release, withheld $100,000 in coverage that it had a duty to pay, and

demanded that Longoria contribute personal funds to settle a potential claim of gross negligence

that had not been raised.

       The latter allegations implicate Farmers’ indemnity obligation: its contractual promise to

pay damages for which Longoria becomes legally responsible. Considering solely Longoria’s

petition and Texas law, as we must under Rule 91a, we conclude that Longoria may pursue a

claim for breach of Farmers’ duty to indemnify.

               1.      The policy’s indemnity provision

       “An insurance policy is a contract that establishes the respective rights and obligations to

which an insurer and its insured have mutually agreed,” and we generally “construe a policy

using the same rules that govern the construction of any other contract.” USAA Tex. Lloyds Co.

                                                11
v. Menchaca, 545 S.W.3d 479, 488 (Tex. 2018) (cleaned up). “In liability insurance policies

generally, an insurer assumes . . . the duty to indemnify the insured, that is, to pay all covered

claims and judgments against an insured . . . subject to the terms of the policy.” D.R. Horton–

Tex., Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740, 743 (Tex. 2009) (cleaned up). 3 According to

Longoria’s petition, the policy provides that Farmers “will pay damages for bodily injury or

property damage for which any covered person becomes legally responsible because of an auto

accident.”

         Longoria has alleged that she is a covered person, and that she and Farmers paid an

amount within Farmers’ limit of liability to settle Gibson’s claims of bodily injury and property

damage because of an auto accident. Farmers argues it did not breach its obligation to pay the

remainder, however, because no court has determined that Longoria was “legally responsible”

for the $100,000 she contributed to the settlement. Gibson’s suit against Longoria settled before

trial, this argument runs, so she will never become legally responsible for damages and therefore

cannot maintain a claim against Farmers for breach of contract. We disagree. Because Texas

courts recognize that an insured can become legally responsible due to a settlement, Longoria

has alleged facts that trigger Farmers’ payment obligation under the plain language of this policy

provision.

3
  See also 2 WINDT, INSURANCE CLAIMS & DISPUTES § 6:1 (“The most fundamental of an insurer’s obligations under
an insurance contract is its duty to indemnify—its duty, depending on the type of policy, either to reimburse the
insured for losses incurred directly by the insured or to pay sums that the insured becomes legally obligated to pay to
others.”).

                                                         12
        “A court judgment against an insured is not the only manner by which an insured can

become legally obligated to pay a claim; a legal obligation can also arise out of a contract, such

as a settlement.” 46 TEX. JUR. 3D INSURANCE CONTRACTS & COVERAGE § 893. 4 For example,

we have held that an excess insurer was obligated to indemnify an insured for liability

established by settlement. Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660,

675 (Tex. 2008) (holding ATOFINA was an insured under the policy and therefore entitled to

coverage for its contribution to settlement). And Texas courts of appeals have construed similar

policy language “to provide unambiguously that the duty to indemnify arises only after an

insured’s legal responsibility for covered damages has been established by judgment or

settlement.     [This] conclusion finds ample support in our State’s jurisprudence and other

authorities.” Ohio Cas. Ins. Co. v. Time Warner Entm’t Co., L.P., 244 S.W.3d 885, 890 (Tex.

App.—Dallas 2008, pet. denied) (emphasis added); 5 see 2 ALLAN D. WINDT, INSURANCE CLAIMS

& DISPUTES § 6:6 (“Third-party liability policies require, as a condition precedent to the insurer’s

liability, that the insured be liable to a third person, by means of either a judgment or a

settlement.”). A contrary rule that insists on a judgment before indemnity can be sought “would

4
  See also THE CLAIM ADJUSTER’S AUTOMOBILE LIABILITY HANDBOOK § 2:1 (“The duty to indemnify is determined
by the facts that are established at trial or that are finally determined by some other means, for example, through
discovery during the litigation, through summary judgment, or settlement.”). Of course, other policy provisions may
require the insurer’s consent to the settlement for coverage to apply, but there is no dispute here that Farmers
consented to the settlement.
5
  See also Archon Invs., Inc. v. Great Am. Lloyds Ins. Co., 174 S.W.3d 334, 339 (Tex. App.—Houston [1st Dist.]
2005, pet. denied) (“[T]he duty to indemnify . . . arises only after the insured has been adjudicated legally
responsible for damages in a lawsuit by judgment or settlement.”); Comsys Info. Tech. Servs., Inc. v. Twin City Fire
Ins. Co., 130 S.W.3d 181, 190 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) (same); Collier v. Allstate Cty.
Mut. Ins. Co., 64 S.W.3d 54, 62 (Tex. App.—Fort Worth 2001, no pet.) (same); Reser v. State Farm Fire & Cas.
Co., 981 S.W.2d 260, 263 (Tex. App.—San Antonio 1998, no pet.) (same).

                                                        13
contravene the policy of the courts to encourage settlements and to minimize litigation.” Getty

Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 799 (Tex. 1992). 6

        Here, Longoria’s petition attaches the agreement settling Gibson’s suit. The agreement

provided that Gibson released Longoria for consideration of $350,000: $250,000 to be paid by

Farmers and $100,000 to be paid by Longoria. This settlement establishes that Longoria was

“legally responsible” for damages because of the auto accident with Gibson. See Ohio Cas. Ins.

Co., 244 S.W.3d at 890. Moreover, Farmers participated in the settlement, tendering $250,000 in

payment of its portion of Gibson’s claim and thereby preventing a determination of liability at

trial. It would be strange indeed if Farmers’ participation had the effect of relieving it of any

obligation under the policy to pay Gibson.

        Farmers points out that a different policy clause gave it the right to “settle . . . as it

considers appropriate.” Longoria’s petition appears to allege that Farmers also breached this

clause by failing to accept an offer to settle within policy limits. We agree with Farmers that this

part of her claim for breach of contract has no basis in law.                      Farmers concluded it was

appropriate here to structure a settlement under which both it and Longoria contributed funds to

obtain a release. See 14A COUCH              ON INSURANCE        § 203:30 (“[A]n insurer can and should

condition settlement upon the injured party releasing the insured.”). But Longoria can assert—

and has asserted—a claim against Farmers for breaching its separate promise to pay the damages

for which this settlement made her legally responsible.

6
  The dissent suggests that this rule should apply to settlements only if the insured admits to facts that would
establish fault in the settlement agreement. Post at __. But it identifies no authority supporting that view, and we
have found none.

                                                        14
                     2.       Other issues that may affect Longoria’s claim

           Our conclusion that Longoria has alleged facts meeting the elements stated in her

policy’s indemnity provision does not mean she will succeed in proving that Farmers is liable for

breach of the policy. Because this case comes to us on a Rule 91a motion, we may not consider

evidence regarding what Farmers’ reasons were for non-payment or whether those reasons

implicate other policy provisions or legal doctrines that would prevent any liability for breach. 7

TEX. R. CIV. P. 91a.6. The entire policy is not before us because it was neither quoted in

Longoria’s petition nor attached as an exhibit. Id. On remand, Farmers is free to offer evidence

that it did not breach the policy.

           More generally, we do not hold that insureds who settle third-party claims unilaterally—

without the consent or participation of their insurers—are entitled to reimbursement under their

policies. The indemnity provision is only one part of a liability insurance policy, and there are

other legal grounds that may prevent an insurer from being obligated to pay a settlement. 8

           For example, Longoria pleads some facts suggesting that Farmers decided not to pay the

entire settlement because it concluded part of Gibson’s suit was not covered by the policy. She

alleges that a reason Farmers gave for soliciting her personal contribution to the settlement was

that she had “created potential liability for gross negligence”; she also alleges that Gibson had

not asserted a claim for gross negligence. Farmers does not address these allegations or take a

position on what Gibson pled or whether its policy would cover liability for gross negligence. If

7
    In any event, the record is unsurprisingly unclear on these matters at this early stage of the litigation.
8
  We have recognized that reimbursement may be required in the event of a prior material breach by the insurer,
such as a wrongful refusal to defend or denial of coverage. E.g., Evanston Ins. Co., 256 S.W.3d at 670–74; Emp’rs
Cas. Co. v. Block, 744 S.W.2d 940, 943 (Tex. 1988).

                                                              15
a policy does not provide coverage for a claim made against an insured, the insurer has no duty

to indemnify regarding that claim. See, e.g., Mid–Continent Cas. Co. v. Castagna, 410 S.W.3d

445, 450 (Tex. App.—Dallas 2013, pet. denied). On the other hand, if the insurer wrongly

denies coverage, the insured is entitled under the policy to have the insurer pay the amount for

which she is legally responsible. 9

         These rules continue to apply when, as here, a suit is settled before the coverage dispute

is resolved. If a liability insurer disputes whether some claims asserted against its insured are

covered, it may comply with its policy obligations by defending under a reservation of rights,

and it may settle the entire suit and—with the insured’s consent—reserve for separate litigation

the question whether the insured should reimburse it for part of the settlement. E.g., Excess

Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42,

43 (Tex. 2008); Tex. Ass’n of Counties Cty. Gov’t Risk Mgmt. Pool v. Matagorda Cty., 52

S.W.3d 128, 135 (Tex. 2000). This approach also works the other way: if an insurer agrees to

settle some claims but refuses to cover others, the insured may join with it to settle the entire suit

and reserve for separate litigation the question whether the insurer should reimburse it for the

remainder of the settlement. See 2 WINDT, INSURANCE CLAIMS & DISPUTES § 6:31 (“Coverage

questions [can] arise . . . when an insured pays all or part of a settlement and then seeks

reimbursement from the insurer.”). 10 In that separate litigation for breach of the indemnity

obligation, the insured must prove that the refused claims were in fact covered. See Seger v.

9
  See Evanston Ins. Co., 256 S.W.3d at 671–74; 1 WINDT, INSURANCE CLAIMS & DISPUTES § 5:1 (“[A]ssuming that
there is coverage for all the claims made against the insured, the insurer should not request the insured to contribute
to a settlement for an amount within the policy limits . . . .”).
10
   The terms of any agreement between the insured and the insurer may shed light on whether this question is being
reserved or compromised.

                                                         16
Yorkshire Ins. Co., 503 S.W.3d 388, 400 (Tex. 2016) (discussing insured’s burden in proving

coverage). 11

           If the claims against the insured are covered, there are other questions that may need to

be answered before an insurer can be held liable to indemnify the insured for a settlement. Many

policies include provisions that give the insurer exclusive control over settlement, allowing it to

refuse indemnity for an insured’s unilateral settlement or decline to join with its insured in

settling a claim, choosing instead to go to trial. 12 Farmers does not suggest that Longoria

breached such a provision here—and for good reason. Accepting Longoria’s allegations as true,

Farmers exercised its prerogative to settle, paid the settlement in part, and either demanded or

suggested that Longoria pay the remainder in order to obtain a release.                            Having solicited

Longoria’s contribution, Farmers can hardly contend that it was unauthorized. In short, Farmers

structured a within-limits settlement but did not pay it fully, giving rise to a claim whether its

consent to settle contingent on the insured’s payment breached its duty to indemnify her.

           An insurer also will not be obligated to indemnify its insured for a settlement that is

collusive or unreasonable in amount. See E.I. du Pont de Nemours & Co. v. Shell Oil Co., 259

S.W.3d 800, 810 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (party seeking indemnity

must show “that the settlement was reasonable, prudent, and made in good faith under the

circumstances”); Tex. United Ins. Co. v. Burt Ford Enters., 703 S.W.2d 828, 835 (Tex. App.—

Tyler 1986, no writ).            When a plaintiff and a defendant-insured reach an agreement that

compromises the insured’s incentive to “ensure that the judgment or settlement accurately

11
     We do not hold that Longoria could use the policy to insist that Farmers settle an uncovered claim.
12
     See Traver, 980 S.W.2d at 627; 1 WINDT, INSURANCE CLAIMS & DISPUTES § 3:9 & n.2.

                                                           17
reflects the plaintiff’s damages and thus the . . . covered liability loss,” the insurer will not be

bound to the amount. Great Am. Ins. Co. v. Hamel, 525 S.W.3d 655, 666 (Tex. 2017). This

concern does not appear to be present here, however, as Longoria paid part of the settlement out

of her own pocket. In addition, an insured generally must show that the settlement amount “is

one that a reasonable person who bears the sole financial responsibility for the full amount of the

potential covered judgment would [pay].” RESTATEMENT OF THE LAW OF LIABILITY INSURANCE

§ 27(2)(d). 13 If Farmers contends that Longoria should not receive full reimbursement because

she paid an unreasonable amount to settle the remainder of the suit, the parties may introduce

evidence on that issue in the trial court. 14

                  3.       Stowers does not eliminate the duty to indemnify

         Farmers also asks us to hold that an insured’s only avenue to sue an insurer for

mishandling a third-party claim is under the Stowers doctrine, and therefore Longoria cannot sue

for breach of contract. As support for this position, Farmers relies on our decision in Maryland

Insurance Co. v. Head Industries Coatings & Services, Inc., 938 S.W.2d 27 (Tex. 1996). We

disagree with Farmers’ reading of Head.

13
   See also 14A COUCH ON INSURANCE § 203:43 (listing factors relevant to reasonableness of settlement); Kenneth
S. Abraham, The Liability Insurer’s Duty to Settle Uncertain and Mixed Claims, 68 RUTGERS U.L. REV. 337, 361
(2015) (insured must prove “that the amount of the settlement was reasonable in light of the probability that the
claim against the insured would succeed and the amount of likely damages”); Syverud, The Duty to Settle, 76 VA. L.
REV. at 1124–25. In some circumstances, such as when an insurer wrongly denies coverage, we have held that the
insurer may not challenge the reasonableness of the insured’s settlement. Evanston Ins. Co., 256 S.W.3d 671–74.
The parties have not addressed whether such a circumstance is applicable here, and we express no view on that
issue.
14
   The dissent points out that Farmers made the decision to pay no more than $250,000 to settle, but the petition does
not reveal whether Farmers reached that decision by valuing all claims or only the claims it thought were covered.
Thus, it is unclear whether Farmers regards Longoria’s payment of an additional $100,000 as unreasonable if all
claims are determined to be covered.

                                                         18
         At issue in Head was whether to recognize a cause of action against an insurer for breach

of a common-law duty of good faith and fair dealing when the insurer denied coverage and

refused to defend its insured against a third-party claim. Id. at 28. We declined to recognize the

cause of action, holding that “Texas law recognizes only one tort duty in this context, that being

the duty stated in Stowers.” Id. at 28 (emphasis added). We reversed the court of appeals’

contrary judgment, explaining that the court had “overlooked the fact that an insured is fully

protected against his insurer’s refusal to defend or mishandling of a third-party claim by his

contractual and Stowers rights.” Id. at 28–29 (emphasis added).

         Farmers contends that our recognition of contractual rights in Head does not extend to

mishandling a claim because the insurer in that case wholly refused to defend. We disagree.

The issue presented by Farmers’ motion to dismiss is whether Texas law recognizes a cause of

action for breach of an insurer’s contractual obligation to indemnify when the insurer opts to

settle a third-party claim against its insured by paying an amount less than policy limits and

requires the insured to contribute in order to obtain a release.                        Our decision in Head

acknowledges that Longoria is protected from Farmers’ alleged mishandling of the claim by her

contract rights, and no court has held that a claim for breach of contract is unavailable. We

specifically declined in Head to recognize any tort cause of action for mishandling a claim (other

than Stowers), id. at 28, but we did not determine that a claim for breach of contract is precluded

by Stowers or any other Texas law. 15

15
   Although Head declined to recognize a common-law cause of action for breach of a duty of good faith and fair
dealing, the Legislature has created certain “bad faith” claims by statute. One such claim is for an insurer’s failure
to attempt in good faith to settle when liability has become reasonably clear. TEX. INS. CODE § 541.060(a)(2)(A);
see Rocor Int’l v. Nat’l Union Fire Ins. Co., 77 S.W.3d 253, 260–62 (Tex. 2002) (looking to Stowers principles in
deciding when liability is reasonably clear). Longoria has not alleged a statutory claim here.

                                                         19
           Further, Longoria is not protected by Stowers because we hold above that a Stowers

claim is not permitted when—as here—there is no excess liability against the insured. 16

Permitting a claim for breach of contract for failure to indemnify under these circumstances is

not inconsistent with Stowers. See Garcia, 876 S.W.2d at 846 (discussing different sources of

duty to indemnify and Stowers duty to accept reasonable settlement demands within policy

limits).

           As we have explained, a Stowers claim sounds in tort. See Head, 938 S.W.2d at 28;

Hernandez v. Great Am. Ins. Co. of New York, 464 S.W.2d 91, 94 (Tex. 1971). Resort to tort

principles is necessary when an insured seeks to recover damages from an insurer that exceed the

contractually agreed limits on its liability. See Stowers, 15 S.W.2d at 547. Tort principles are

not necessary, however, to provide the insured a remedy for damages within policy limits.

Rather, the contract itself requires an insurer to pay such damages for a covered claim. See

Henson v. S. Farm Bureau Cas. Ins. Co., 17 S.W.3d 652, 653 (Tex. 2000) (holding that insured

and insurer were contracting parties and their duties were established by contract, including duty

of insurer to pay to extent of policy limits); RESTATEMENT OF THE LAW OF LIABILITY INSURANCE

§ 27 note b (collecting “authority supporting the insured’s ability to recover for a within-limits

16
   And even if the case had not settled and the eventual judgment on the $2 million claim had exceeded Longoria’s
$500,000 policy limits, Longoria was not certain to recover the amount of the excess judgment under Stowers.
Rather, she would need to prove that an ordinarily prudent insurer with the information available at the time would
have accepted the offer to settle within policy limits “considering the likelihood and degree of the insured’s potential
exposure to an excess judgment.” Garcia, 876 S.W.2d at 849; see, e.g., Am. Guar. & Liab. Ins. Co. v. ACE Am. Ins.
Co., 413 F. Supp. 3d 583, 597 (S.D. Tex. 2019) (holding insurer did not breach its Stowers duty by rejecting $2
million settlement offer where eventual judgment was over $27 million because “a reasonable insurer could still
have been confident in a defense verdict” at that time). In addition, Longoria alleges that Farmers injected the issue
of gross negligence into the case even though the plaintiff suing her had not pled it, which raised the possibility that
part of the judgment would not be covered. See Garcia, 876 S.W.2d at 848 (“[A]n insurer has no duty to settle a
claim that is not covered under its policy.”). Faced with an insurance company that was allegedly working against
her, Longoria had every incentive to limit her exposure as much as possible.

                                                          20
settlement entered into to avoid an excess verdict”). As in this case, many insuring agreements

state that the insurer’s duty regarding settlement ends when its coverage has been exhausted, i.e.,

the policy limits on its liability have been reached. 17 Stowers does not preclude a claim against

the insurer for breach of contract when the insured alleges that she suffered damages within

policy limits.

                  4.       Response to the dissent

         Our dissenting colleagues contend that Longoria has no claim for breach of contract

because an insurer only has a duty to indemnify based on a settlement when the insured admits to

facts establishing her legal responsibility for an accident. Post at __. Although the dissent does

an admirable job of writing the motion for summary judgment that Farmers could have filed,

Farmers does not make this argument, and Longoria has not had an opportunity to respond to

it. 18 Rather, as explained above, Farmers chose to file a motion to dismiss under Rule 91a,

arguing that it had no contractual duty to indemnify because there had not been a trial, so there

would never be a determination that Longoria was “legally obligated” to pay any damages. As

we have already explained, Farmers’ argument that the settlement did not legally obligate

Longoria to pay damages is incorrect.

         We do not disagree with the dissent’s point that the duty to indemnify “depends on the

facts proven and whether the damages caused by the actions or omissions proven are covered by

17
   This issue often arises in cases involving excess insurers. Courts have held that a primary insurer’s coverage is not
exhausted by a within-limits settlement. See, e.g., Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, 372 (5th Cir.
2011). The Fifth Circuit held that an excess insurance policy was never triggered because the within-limits
settlement did not exhaust the underlying insurance policy.
18
   See Pike v. Tex. EMC Mgmt., LLC, 610 S.W.3d 763, 782 (Tex. 2020) (“Our adversary system of justice generally
depends ‘on the parties to frame the issues for decision and assign[s] to courts the role of neutral arbiter of matters
the parties present.’” (quoting Greenlaw v. United States, 554 U.S. 237, 243 (2008))).

                                                          21
the terms of the policy.” D.R. Horton-Tex., Ltd. v. Markel Intern. Ins. Co., Ltd., 300 S.W.3d

740, 744 (Tex. 2009). But those facts are not required to be proven in an underlying trial against

the insured and are often proven in coverage litigation. Id. “This is especially true when the

underlying liability dispute is resolved before a trial on the merits and there was no opportunity

to develop the evidence,” as was the case in D.R. Horton and is the case here. See id. The

dissent faults us for not explaining when a settlement triggers an insurer’s duty to indemnify.

But as with the duty to indemnify generally, that will depend on the evidence—which we do not

have at this early stage of the case.

        Finally, citing the policy’s “no legal action” clause, the dissent contends that because

Longoria did not specifically allege a writing in which Farmers agreed she had an obligation to

pay Gibson, she may not bring an action against Farmers. Post at __. Farmers did not brief this

argument either, perhaps because it recognized that the policy containing this clause was not

attached as a pleading exhibit. Therefore, we may not consider the clause in reviewing this Rule

91a motion. See Tex. R. Civ. P. 91a.6 (providing that in considering a Rule 91a motion, a court

may not consider evidence and “must decide the motion based solely on the pleading of the

cause of action, together with any pleading exhibits”). As explained in Part III.B.2. above,

Farmers may offer evidence on remand regarding this clause and its application to this case, and

Longoria will have an opportunity to respond. 19

                                                *        *        *

19
   In any event, the facts alleged by Longoria and inferences drawn therefrom do not conclusively establish that the
“no legal action” clause applies and that it was not satisfied. Longoria alleged that Farmers participated in a
settlement within its policy limits, wrote Gibson to remit two-thirds of the settlement amount, and conditioned a
release on Longoria’s payment of the remainder. As we have explained, Farmers’ alleged role in the settlement
precludes dismissal at this early stage on the ground that it had no duty to indemnify as a matter of law.

                                                        22
       We do not determine today what the policy as a whole required, whether Farmers

breached it by consenting to settle within policy limits but making the insured’s release

contingent on her contribution, or whether Longoria can prove damages. Rather, our holding is

limited to the scope of Farmers’ Rule 91a motion and clarifies a narrow issue: Stowers and the

other principles of Texas insurance law cited by Farmers do not foreclose as a matter of law a

claim for breach of contract against an insurer regarding its indemnity obligation. Thus, the trial

court properly denied Farmers’ Rule 91a motion to dismiss Longoria’s cause of action for breach

of the contractual obligation to indemnify, and the court of appeals erred in concluding

otherwise.

                                          CONCLUSION

       We conditionally grant mandamus relief to Farmers because the trial court abused its

discretion in denying Farmers’ Rule 91a motion to dismiss Longoria’s Stowers claim for

negligent failure to settle. We direct the trial court to grant Farmers’ motion in part and dismiss

that claim, and our writ will issue only if the trial court fails to act in accordance with this

opinion. We also conditionally grant mandamus relief to Longoria in part, holding that the court

of appeals erred in ordering the trial court to dismiss her claim for breach of the contractual

obligation to indemnify. That claim may proceed in the trial court.

                                                23
                                    __________________________________
                                    J. Brett Busby
                                    Justice

OPINION DELIVERED: April 23, 2021

                                     24