FIFTH CIRCUIT REAFFIRMS SORIANIO PROTECTION OF LIABILITY CARRIERS FROM MULTIPLE EXPOSURES IN EXCESS OF POLICY LIMITS

Last Wednesday, the Fifth Circuit refused to hold a liability and excess carrier liable for accepting a reasonable policy limits settlement demand on behalf of one insured, leaving another insured exposed to liability and defense costs.  In doing so, the court declined to extend the Stowers rule and re-affirmed Soriano’s protection of insurers faced with large claims against multiple insureds.  In Pride Transportation v. Continental Cas. Co., No. 11-10892 (5th Cir. Feb. 6, 2013), a trucking company and its employee driver were sued after a major auto accident.  The damages potentially exceeded the limits of both the primary and excess policies.  The claimants made an offer to settle with the driver, but not the company, for the total limits of both policies.  After attempting to obtain a release of the company as well, the carriers accepted the settlement on behalf of the driver only.  The carriers then withdrew their defense of the company on the ground that both policies had been exhausted and there was no further duty to defend or indemnify the company.

 The trucking company sued both carriers alleging that accepting the settlement only on behalf of the driver was unreasonable and the carriers should not be released from their duty to defend the company.  The company argued that reasonableness of a settlement demand is a fact question which should be determined in light of the total liability to all insureds.  The court disagreed and concluded that in light of the undisputed facts creating a high risk of personal exposure for the driver, the carriers’ actions were reasonable as a matter of law. The court rejected this creative use of Stowers, stating, “…we decline to use this case, as [company] wishes, to extend the Stowers duty to impose liability on insurers for accepting demands.”  The court fell back on the Soriano principle applicable in Texas, which protects a carrier from liability when it accepts a reasonable demand on behalf of one insured, even though that settlement may exhaust the policy limits and leave another insured exposed.

 The court also summarily rejected the company’s attempts to assert common-law bad faith claims re- affirming that  the common-law tort of bad faith does not apply to third-party liability claims and that its statutory equivalent under Texas Insurance Code §541 is governed by the Stowers standard.