The Texas Supreme Court recently increased policyholders’ influence over an insurer’s right to settle a third-party claim for less than policy limits. Insurers have long enjoyed a nearly absolute right to settle claims, even over policyholders’ objections; but In re Farmers Texas County mus. Ins Co.,___ S.W.3d ___, 2021 WL 1583878 (Tex. Apr 23, 2021) changed this, giving policyholders the right to seek reimbursement from an insurer who settles for less than the policy limits, but forces contribution by the insured to obtain the release.
Cassandra Longoria rear-ended a vehicle driven by Gary Gibson, who sued her for $1 million. Farmers undertook Longoria’s defense; but rejected Gibson’s offer at mediation to settle for $350,000, refusing to pay more than $250,000. Gibson withdrew the offer and increased his claim to $2 million. As trial approached, Longoria negotiated Gibson back to $350,000, but Farmers again refused to contribute more than $250,000. Concerned about her personal exposure, Longoria agreed to pay the additional $100,000 herself, but without waiving her right to seek recovery of the payment from Farmers. Gibson accepted and gave Longoria a release in exchange for Farmers’ and Longoria’s payments.
Longoria then sued Farmers for reimbursement of the $100,000 payment, alleging both a negligent failure to settle and a breach of Farmers’ contractual duty to settle.
The Texas Supreme Court concluded that Longoria had a right to pursue recovery under her breach of contract theory, though she still needed to prove the reasonableness of her contribution. To do so, the court relied on its earlier decisions granting insurers the right to defend and settle claims when coverage is disputed, while reserving for separate litigation the question of whether the insured should reimburse them for a part of the settlement. (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)). What’s good for the goose is apparently good for the gander, so the court concluded that “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.”
In re Farmers is significant because it establishes that an insurer’s right to settle a case is not absolute, and the policyholder has a voice in the process. In Texas, insurers now act at their own peril when they require their insureds to contribute to reasonable settlement demands within policy limits.
Policyholders should be skeptical any time their insurer asks them to contribute to a settlement within policy limits, and contact their coverage counsel for further guidance.