The Texas Supreme Court recently heard argument on whether Gandy’s “fully adversarial trial” exception to the Stowers doctrine – which enables insureds to require insurers whose negligence results in a judgment above policy limits to indemnify the full amount of the judgment – applies when there could not have been a “fully adversarial trial” because the insurer wrongfully failed to defend its insured. Yorkshire Ins. Co., Ltd. v. Seger, 407 S.W.3d 435, 436 (Tex. App.—Amarillo 2013), review denied (Feb. 14, 2014), order withdrawn (Aug. 29, 2014), petition reinstated (Aug. 29, 2014), review granted (Mar. 13, 2015).

An oil field worker was killed in a rig collapse. His heirs obtained a default judgment against a party that was insolvent and dissolved at that point, but which assigned to the worker’s heirs its claim against its insurers. His heirs were awarded damages after the court found that their claims were covered and that the default judgment was the result of an adversarial trial. The Court of Appeals found that the default judgment was not the result of a truly adversarial proceeding, holding that the judgment was based on insufficient evidence of damages. The heirs appealed.

In briefing to the Texas Supreme Court, the insurers argued that the judgment was a sham and that they should not be liable for it because the judgment did not arise from a “fully adversarial trial” as required by the Texas Supreme Court in State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). According to the insurers, “[t]his is the case Gandy sought to prevent,” and the Stowers doctrine must not apply if, in a case where no coverage exists, the parties’ lawyers agree to create a Stowers situation “by allowing a sham default judgment in an unsupportable amount for collection directly from the defendant’s insurer, rather than from the dissolved, insolvent defendant.” The decedent’s heirs rely on Evanston Ins. Co. v. Atofina Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), which held that an insurer may not challenge a settlement’s reasonableness when it has refused defense or coverage, and contend that the insurers’ refusal to defend made a truly adversarial proceeding impossible.