Michael Sean Quinn*
The “Stowers Doctrine” is based upon a case styled (entitled) G.A.Stowers Furniture Co. v. Am Indem. Co. 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved). For some history on the case, see  Vince Morgan & Michael Sean Quinn,“Damn Fools” – Looking Back at Stowers after 75 Years, 6 J.
Texas Ins. Law
2 (May 2005). 
(Vincent Morgan was the senior author though 20 years my junior, the idea was his. Vince is among my most talented students.)

The problem underlying that case was (and remains) this.  A liability insurer has a duty to defend its insured when the plaintiff’s pleading(s) and the insurance policy, taken together, but otherwise alone, at least firmly suggest that there may be coverage. 

But there’s a problem. Suppose the plaintiff is seeking and somewhat likely to obtain an award of damages larger than the policy limits. Assuming that there is coverage, if now the contract of insurance and the probable facts are considered, the insured would be left exposed for all the damages adjudged against it that the policy does not cover because they exceed the upper limits of the amounts the policy covers, and that might be a large sum, indeed. 

(Sometimes victim-plaintiff and insured-defendant engineer the damages to be vastly more than policy limits. Sometimes insureds cooperate with the allegedly injured plaintiffs to chase off insurers and so trap them into having to pay extra policy limits damages. Sometimes those arrangements are hidden.) 

Now, the case brought by the plaintiff and defended by the liability insurer might come out for the  plaintiff. The defending insurer that tries the case with exposure larger than policy limits is gambling with the insured’s money. There needs to be a legal device to protect the insured from irresponsible litigation gambling by the defending insurer.  At the same time, it must be remembered, that it was the insured that chose how much insurance to buy, so that the insured is impliedly taking part of the  risk of exposure on itself.  

In the case being discussed here, for example, the policy limits were $500,000.00, and the damage award exceed $71.5M. (Truth be told, this number was illusory, though very scary.)

Thus, the Texas Supreme Court has, for many years, searched for a legal doctrine which would protect the insured from an insurer’s imprudent desire to bet on winning the case and an insurer from certain problems an insured might create for it.

The solution was (and is) the “Stowers Doctrine.” It has been modified several times but each of those changes have been slight, even though some lawyers like to say they are gigantic.  The over all substance has remained pretty much the same. In a recent decision, Seger v. Yorkshire Insurance Co., Ltd., decided June 17, 2016 (Case #13-0673), the Texas Supreme Court set forth a somewhat new formulation of the “Stowers Doctrine”–one that will probably last a generation, at least in substance. 

(Of course, during the next interval, lawyers will tinker, doodle, and dawdle over the Yorkshire opinion, present themselves as lawyers of enormous insight and creativity, and engage in “Stower amusements” that will create complex briefs, even more complicated coverage opinion letters, lengthier litigation, an occasional meaningless change in one court of appeals or another,  more CLE lectures, and a good deal of prideful strutting.)  

Thus, Stowers will remain an enduring doctrine. Granted, there is one problem with it, but it is merely a problem in language usage, but otherwise of no real consequence. This will be mentioned later. 

Here is what the SupremeCourt lays out in the opinion under discussion, citations omitted:

“A Stowers cause of action arises when an insurer negligently fails to settle a claim covered by an applicable [liability] policy within policy limits. To prove a Stowers claim, the insured much establish that (1) the claim is within the scope of coverage; (2) a demand was made that was within policy limits; and (3) the demand was such that an ordinary, prudent insurer would have accepted it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.” 

(Interestingly, over the generations, one of the disputed matters has been what “sub-elements”regulate what counts as an obligation-triggering “Stowers Demand.  These Demands are and probably must be written, and so there is such a thing as a “Stowers Demand Letter.” There is hence a substantial CLE-level literature as to what counts as legally sufficient “Demand Letter” in this context. If that ever was a problem, except for incompetent lawyers, the Seger opinion has killed it off.  

Obviously, states the Court, the Stowers Doctrine does not apply, if there is no coverage–or no relevant coverage–under the policy. Significantly the burden of proving coverage under the terms of the policy is upon the insured. Consequently, the insured bears the burden of proof with respect to whether there is a compensable  Stowers cause action.  There is a trivial mistake in here, elsewhere impliedly corrected in the Yorkshire opinion. 

The mistake is to say that the insured bears the entire burden of whether the Stowers Doctrine applies. The problem arises out of the fact that the insured has the burden of proving coverage, in one sense, but the insurer has an applicable duty too.  To be sure, it is the duty of the insured to prove that the so-called coverage section applies, that the policy applies as to time and place, and (almost always) that the conditions for coverage are met. However, it is the duty of the insurer to prove that an exclusion applies, if and to the extent the insurer is denying coverage based upon an exclusion, while the burden of proof shifts back to the insured if it invoking an exception of an exclusion. 

What’s going on here is that there are two meanings of the word “coverage.” One has to do with what the policy says is “covered.” Section A in some policies. If a state of affairs falls within this “jurisdiction,” then the insurer bears the burden of proof. 

In whole contract, however, the term “coverage” covers all of the policy. In this second sense, there is no coverage if an exclusion applies.  The insured bears the entirety of the burden of proof in the first sense of the word “coverage” but not in the second.  

This ambiguity is well known and easy to discern, since it hinges on the express formulation of the policies, and in our day there is a more or less standard way for policies to be outlined.  

Of course, there are sophistical jurisprudential wags, who have suggested that exclusions are hidden in the this-is-covered section. Consider the following hypothetical: “This policy covers all occurrence that take place on even numbered days.” Isn’t it so, the rebel might say, that all odd numbered days are excluded by the clause in the coverage section? Of course, in theory, this observation is correct, but no one in law practice has ever “bought” it.  It is widely believed that from a pragmatic point of view, there is such a thing as a distinction without a difference 

      Michael Sean Quinn

Law Office of Michael Sean Quinn 
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Austin, Texas 78703
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