Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.
Disclaimer — Not Legal Advice. This article is published for general informational and educational purposes only. It is not legal advice, does not create an attorney-client relationship, and should not be relied upon as a substitute for advice from a licensed attorney in your jurisdiction. Statutes, rules, and case law change frequently; portions of this article may be out of date by the time you read it. Reading this article, contacting the author, or commenting on it does not, by itself, retain counsel. If you believe you have a legal claim or defense, consult an attorney admitted in the relevant jurisdiction promptly because deadlines (statutes of limitations, claim-presentment, and notice requirements) can extinguish rights without warning. Prior results do not guarantee a similar outcome.
Alabama has no Stowers statute, but it does have a third-party bad faith doctrine. The insurer that ignores a reasonable within-limits demand in Alabama is walking into the same trap — just without a Texas map.
Doctrinal Framing
G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, judgment approved), is one of the most consequential insurance law decisions ever rendered. Its holding — that an insurer defending a third-party claim within its policy limits has a duty to accept a reasonable settlement offer within those limits, and that failure to do so creates liability for any resulting excess judgment — has been adopted, adapted, or recognized in some form in virtually every American jurisdiction.
Alabama is not a formal "Stowers jurisdiction" in the sense of having a statute or a decision that expressly adopts the Stowers doctrine by name. But Alabama has its own third-party bad faith doctrine, rooted in Waters v. American Casualty Co., 73 So. 2d 524 (Ala. 1954), and developed through subsequent decisions, that imposes obligations on liability insurers functionally analogous to the Stowers duty. The practical result is that the "Stowers-style demand" — a within-limits, unconditional settlement offer with a reasonable deadline — is a critical strategic tool in Alabama third-party insurance litigation, even without the Texas statutory scaffolding.
This post examines the Alabama third-party bad faith doctrine, what makes a demand "Stowers-style," the elements counsel must satisfy, and the litigation strategy for maximizing exposure in cases where the insurer refuses a reasonable demand.
Alabama's Third-Party Bad Faith Foundation
Waters v. American Casualty Co. (1954)
Waters v. American Casualty Co., 73 So. 2d 524 (Ala. 1954), is the origin of Alabama's third-party bad faith doctrine. The case arose from an insurer's refusal to settle a third-party claim within policy limits, followed by a verdict in excess of those limits. The Alabama Supreme Court held that the insurer owed the insured a duty to give fair consideration to settlement opportunities and that the insurer's failure to honor that duty created liability for the excess judgment.
Waters applied what is now recognized as an "all facts and circumstances" standard: whether the insurer acted in good faith must be evaluated against the totality of the situation known to the insurer at the time the settlement opportunity was available. This "totality" framing aligns functionally with the Berges standard in Florida, though Waters predates Berges by fifty years and developed on a common-law track independent of the Florida statutory framework.
First-Party vs. Third-Party Bad Faith in Alabama
Alabama's bad faith doctrine bifurcates. First-party bad faith — the Chavers/Bowen line — requires proof that the insurer had no arguable reason for denial and knew of that absence. Third-party bad faith — the Waters line — arises when the insurer controls settlement of a claim against the insured and fails to protect the insured from excess judgment by not accepting a reasonable within-limits offer. The standard for third-party bad faith has been described in some Alabama federal court opinions as a negligence or "totality of circumstances" standard, though the precise standard remains contested in Alabama jurisprudence and some decisions suggest the debatable-reason framework also applies in the third-party context.
The doctrinal ambiguity in Alabama — whether third-party bad faith requires the Chavers absence-of-arguable-reason standard or a more general "totality" standard — has not been definitively resolved by the Alabama Supreme Court in the way that Florida resolved it in Berges. Counsel should be prepared to argue both standards in the alternative.
The Anatomy of an Effective Demand
Why Demand Craftsmanship Matters
In Alabama third-party bad faith litigation, the demand is the record. If the insurer rejects or ignores the demand, the demand becomes Exhibit A in the bad faith case: evidence that a reasonable opportunity to settle within policy limits existed and the insurer squandered it. A poorly drafted demand — one that is conditional, unreasonably short, or factually thin — gives the insurer ammunition to argue the demand was not "reasonable" and therefore not a genuine settlement opportunity.
Elements of a Sound Policy-Limits Demand
An effective Stowers-style demand in Alabama should:
1. Be within policy limits. The core of the duty is the insurer's obligation to accept a reasonable offer within its contractual coverage. A demand that exceeds policy limits is not a Stowers-style demand — it does not create bad faith liability for the insurer's refusal, because the insurer has no authority to pay beyond the policy.
2. Offer a complete release. The demand should offer a full release of all claims against the insured arising from the incident in question, conditioned on payment of the demanded amount. A release that carves out certain claimants, certain claims, or certain co-defendants may give the insurer a legitimate reason to reject — defeating the bad faith claim.
3. Specify a reasonable deadline. The deadline must be long enough to allow the insurer to investigate, evaluate, and authorize settlement. What is "reasonable" depends on the complexity of the claim, the amount of information already in the insurer's file, and whether the insurer is being asked to make a quick decision on an undeveloped record or confirm a known valuation. Fourteen to thirty days is commonly used; shorter deadlines for straightforward claims may be defensible but invite challenge.
4. Provide sufficient information to evaluate the offer. The demand should accompany supporting documentation: medical records, bills, expert reports, or other information the insurer needs to assess the claim. An insurer that rejects a demand citing insufficient information is harder to hold to bad faith liability than one that received complete information and still refused.
5. Be unconditional as to the core terms. If settlement requires conditions (such as coordination with a co-insurer, consent of an additional insured, or execution of a particular form of release), identify those conditions clearly and confirm they are reasonable and satisfiable within the deadline. Conditions that make settlement practically impossible are not part of a genuine Stowers-style demand.
Documentation After the Demand
After the demand issues, document everything the insurer does (and does not do). Does it request additional information? Does it respond at all? Does it communicate with the insured about the demand? Does it seek authority to settle? An insurer that receives a complete demand and allows it to lapse without substantive engagement has the weakest possible position in a subsequent bad faith action.
The Insurer's Obligations Once a Demand Is Made
Under the Waters framework and the general duties recognized in Alabama insurance law, once a within-limits demand is presented, the insurer must:
- Investigate the claim promptly. If the insurer's file does not support a confident evaluation of the demand, it must gather the necessary information before the deadline or request an extension — not simply ignore the demand.
- Communicate with the insured. The insurer must inform the insured that a policy-limits demand has been received and advise the insured of the risk that a rejected demand may result in a verdict in excess of coverage. Failure to do so is itself actionable.
- Give good-faith consideration to the offer. The insurer may not reject the demand because acceptance would confirm coverage, because the adjuster has a contrary reserve target, or because payment would hit a metrics threshold. The evaluation must be honest.
- Seek authority if needed. If the settlement authority requires home-office approval, the insurer must pursue that approval in time to respond within the deadline. Bureaucratic delay is not a defense.
The Excess Judgment and Assignment
If the insurer rejects the demand and the case proceeds to a verdict in excess of policy limits, the insured may assign the bad faith claim to the claimant-plaintiff. Alabama recognizes the assignability of bad faith claims, consistent with the general rule in most jurisdictions. The assignment transforms the claimant into the plaintiff in the subsequent bad faith action — where she seeks the full amount of the excess verdict from the insurer.
This structure — demand, rejection, excess verdict, assignment, bad faith action — is the standard template for Alabama third-party bad faith litigation. Each step in the sequence must be documented, beginning with the original demand.
Practice Notes
Serve the demand on the insurer directly, not just the defendant-insured's lawyer. The insurer is the party with settlement authority; the demand should be directed to the insurer and confirmed received in writing. In some cases, also serve the insured directly to ensure actual notice.
Create a contemporaneous record of the demand's factual basis. The bad faith case will turn on what the insurer knew when the demand was pending. Your documentary support for the demand — medical records, police reports, expert assessments — should be organized and dated so that the insurer's claim file shows exactly what information was available.
Research the insurer's policy limits early. An UM/UIM case, a commercial general liability claim, or an umbrella policy may have a different limits structure than the primary policy. Confirm that your demand is within the applicable limits for the specific coverage at issue.
Consider staggered demands for multi-insurer situations. When multiple policies may respond — primary and umbrella, or multiple insurers covering different risks — craft separate demands to each insurer. The primary insurer's failure to exhaust its limits and tender, combined with the umbrella carrier's failure to step down and contribute, can each give rise to separate bad faith claims.
Evaluate the debatable-reason defense in advance. Because Alabama's third-party bad faith standard is not perfectly settled, anticipate the insurer arguing it had an arguable reason not to settle (contested liability, disputed damages, coverage question). Build the demand record and the post-demand investigation record to defeat each of those arguments before they crystallize.
Open Questions
- The applicable standard. Alabama courts have not definitively stated whether third-party bad faith requires the Chavers no-arguable-reason standard, a negligence standard, or the totality-of-circumstances approach. The uncertainty creates litigation risk in both directions.
- Deadline length. What constitutes a "reasonable" deadline for a policy-limits demand in Alabama is fact-intensive and not governed by a bright-line rule. Courts have found both short and long deadlines reasonable, depending on the circumstances.
- Effect of the insured's conduct. If the insured contributed to the failure of settlement negotiations — by refusing to authorize settlement, by providing inaccurate information to the insurer, or by affirmatively obstructing the process — the impact on the bad faith claim is unsettled.
- Punitive damages in third-party bad faith. Whether punitive damages are available in Alabama third-party bad faith cases — and under what standard — is not as clearly established as in the first-party context.
Conclusion
Alabama does not have a Stowers statute or a line of authority that expressly adopts the Texas Stowers doctrine. What it has is a third-party bad faith doctrine rooted in Waters that imposes obligations on liability insurers functionally equivalent to what Stowers requires: when a reasonable within-limits demand is presented, the insurer must take it seriously, evaluate it honestly, and accept it if reasonable. The insurer that rejects such a demand — or lets it lapse without engagement — puts itself in the position that Stowers was designed to penalize: the excess judgment becomes its problem, not the insured's. The work of plaintiff's counsel is to make that demand impossible to ignore, impossible to characterize as unreasonable, and impossible to escape without a paper trail that tells the bad faith story itself.
Talk to Yates Anderson
If you are litigating a matter in this area — or weighing whether to — the working analysis above only goes so far. Request a case evaluation and a Yates Anderson attorney will respond within one business day.
Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.