In Texas, an insurer owes a duty of ordinary care in handling a demand to settle a third-party liability claim against its insured—known as the Stowers duty, derived from the 1929 case by that name. This duty as laid out in the Texas case Am. Physicians Ins. Exch. v. Garcia, which requires the insurer to exercise “that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.” The Stowers duty is not activated unless the claim against the insured is covered, the demand is within policy limits, and 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.

Issues frequently arise in applying the Stowers duty to a claim where there are multiple claimants and/or multiple insureds, and the policy’s limits of insurance are insufficient to settle all the claims. The Texas Supreme Court has held in the 1994 case Texas Farmers Ins. Co. v. Soriano that the Stowers principles apply with “equal force” in such a case and that an insurer may enter into a reasonable settlement with one of the claimants even though that settlement exhausts or diminishes the proceeds available for the other claims, as such a settlement reduces the insured’s overall liability exposure.

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