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Both bankruptcy and the ability for a policyholder to assign its first-party, bad-faith claim against its insurer can be critical methods of risk mitigation. In our last post on Insurance – Texas Style, we looked at the Texas Stowers doctrine, the legal mechanism for policyholders (and their assignees) to pursue extracontractual damages against their insurers in the event of an excess verdict. Stowers liability is a powerful asset for Texas policyholders faced with an improper claim denial or an insurer’s refusal to settle a claim. But the Stowers doctrine requires specific triggering elements – including actual liability exceeding policy limits.
The requirement for actual liability against the insured means that a bankruptcy discharge could negate any assignment of the insured’s Stowers claim, rendering an otherwise powerful bargaining chip worthless. This principal was affirmed this past fall when the 5th Circuit reaffirmed in BPX Production Co. v. Certain Underwriters at Lloyd’s London that a policyholder’s discharge of a claim in bankruptcy forecloses any subsequent Stowers claim by the insured’s assignee.
Background
BPX, an oil and gas producer operating a well in Reeves County, Texas, contracted with BJ Services for oilfield services. BJ Services’ negligence rendered the well inoperable. After BPX invoked the dispute resolution procedure in the parties’ contract, BJ Services sought coverage from its CGL and umbrella insurer. The insurer denied coverage. BJ Services subsequently filed for Chapter 11 bankruptcy during settlement discussions with BPX. Ultimately, the bankruptcy judge approved a settlement between BPX and BJ Services, where BJ Services assigned BPX all of its rights and claims against the insurer for the insurer’s failure to defend and indemnify BJ Services for BPX’s claims. BPX, as BJ Services’ assignee, then sued the insurer on several causes of action, seeking both contractual damages under the insurance policy and extracontractual damages for the insurer’s breach of its duty of good faith.
The Court’s Analysis
The 11th Circuit reversed the magistrate judge’s dismissal of BPX’s contractual claims on the insurer’s duty to defend and indemnify BJ Services. The court found that the duty to indemnify the claim was not nullified by BJ Services’ bankruptcy. However, the court affirmed the magistrate judge’s dismissal of BPX’s extra-contractual claim. First, the court affirmed that the Stowers doctrine remains the sole avenue for bad-faith recovery in Texas. More importantly, the 11th Circuit confirmed that BJ Services’ bankruptcy foreclosed any Stowers liability. Specifically, a prerequisite to Stowers liability is harm or legal injury to the insured. Here, the bankruptcy discharge precluded any actual injury to BJ Services. Lacking this liability, BJ Services could not meet the required elements of a Stowers claim against its insurers. Therefore, BPX had no valid Stowers claim as BJ Services’ assignee.
Takeaway for Policyholders and Assignees
The 5th Circuit’s decision underscores that the Stowers doctrine, though often resolved through an assignment of rights to claimants like BPX, is ultimately a tool to protect policyholders — not claimants. When the risk to the policyholder is discharged through bankruptcy, the underlying premise for Stowers liability disappears — potentially leaving claimant assignees in the lurch. So, while policyholders can leverage their rights under Stowers to resolve crippling liability, and claimants may decide that an assignment of rights is preferable to collecting a judgment, both sides must recognize that a bankruptcy discharge in favor of the insured could render any Stowers liability moot — and negotiate accordingly.
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