Key Points

  • The Fifth Circuit affirmed summary judgment holding Twin City Fire Insurance Co. liable under Texas's Stowers doctrine for a verdict exceeding its employment practices policy limits after it refused a within-limits settlement demand.
  • The panel found the undefined policy term "back pay" ambiguous between a lay meaning (owed but unpaid compensation) and a remedies-based meaning tied to wrongful termination, and it adopted the insured-favorable lay reading.
  • A promised share of sale proceeds conditioned on the employee staying until the sale was not an "employment termination severance payment," even though his job was eliminated when the sale closed.
  • Post-judgment interest under 28 U.S.C. § 1961(a) is mandatory, so the panel refused to strip it from the judgment on the theory that it duplicated interest awarded in the underlying case.
  • Twin City waived its argument that Carpenter failed to meet his initial coverage burden by raising it for the first time in its appellate reply brief.

A federal appeals court ruled Wednesday that Twin City Fire Insurance Co. owes the full amount of a jury verdict, including damages above its policy limits, because it turned down a settlement within those limits. The underlying claim came from a former employee who said his employer broke a promise to pay him for staying through the company's sale.

A U.S. Court of Appeals for the Fifth Circuit panel of Circuit Judges Stewart, Graves and Wilson affirmed summary judgment for the estate of Jeffrey Carpenter in an unsigned opinion. The panel rejected Twin City's argument that two exclusions in his former employer's employment practices liability policy kept the claim outside coverage. It also upheld the trial court's award of post-judgment interest on the entire underlying award.

The ruling turned on two terms the policy never defined: "back pay" and "employment termination severance payment." The panel read the first to reach pay an employee had earned but never received. It held that a payment triggered by a company's sale is not severance, even when the employee loses his job as the deal closes.

Carpenter worked at Southwest Housing Management, according to the opinion. Before the owners sold the company to a third party, they promised him part of the sale proceeds if he stayed until the deal closed. His position was eliminated in the sale, and he received none of the profits. In 2008, he sued Southwest, its owners and related entities in Texas state court for breach of contract.

Carpenter offered to settle within the policy's coverage limits, and Twin City declined. A jury found that Southwest had breached the agreement and awarded more than the policy would cover. The opinion does not state the size of the verdict.

That outcome gave rise to a claim under the Stowers doctrine, a Texas rule that requires an insurer to accept a reasonable settlement demand within policy limits on a covered claim. An insurer that negligently fails to settle is liable for the whole judgment against its policyholder, including the excess. The claim originally belonged to Southwest, but a state court assigned it to Carpenter through a turnover order after Southwest exhausted the policy's limits defending the case, the opinion said.

Carpenter brought the Stowers claim in Texas state court in 2023, and Twin City removed it to the U.S. District Court for the Northern District of Texas. After the district court denied Twin City's motion for summary judgment, the insurer stipulated to every element of Stowers liability except coverage. The district court then granted summary judgment to Carpenter. Joshua M. Carpenter, independent executor for Jeffrey Carpenter's estate, is now the named plaintiff.

The first exclusion strips from covered losses "salaries, wages or bonuses, except as a component of a front or back pay award." Carpenter argued that "back pay" carries its everyday meaning: "owed but unpaid compensation." Twin City urged a narrower, technical reading, under which back pay means equitable relief for employees after adjudicated adverse employment actions.

The panel found that dictionaries supported Carpenter. Texas statutes, court decisions and pattern jury charges, by contrast, tie the term to wrongful termination. "Relevant authorities thus point to two distinct plain meanings for 'back pay': A simple overdue payment, versus a specific legal remedy at times owed to wrongfully terminated employees," the court wrote. "We are left to make a close call."

"But a tie goes to the insured," the panel continued. Texas courts resolve ambiguous insurance terms in favor of coverage, especially in exclusions, the opinion said. Because Carpenter's agreement was "for compensation for work that he had already performed," the damages qualified as back pay.

On the second exclusion, the parties agreed that a severance payment is essentially one made to an employee upon termination, but they disagreed about how it applied. Twin City argued the payment was severance because Carpenter was fired at the same moment his right to the money accrued, when the sale closed. Carpenter answered that his entitlement turned on staying until the sale. "That is, Carpenter contends, Southwest was supposed to pay Carpenter to stay, not to leave," the panel wrote.

The court sided with Carpenter, finding that dictionaries, Texas statutes and Texas decisions all treat termination as the prerequisite for severance. The jury had found that Carpenter agreed to stay "as long as needed . . . to help make [Southwest's] sale happen" in exchange for a share of the proceeds. "True enough, Carpenter was terminated incident to the company's sale, but his termination did not animate the agreement," the panel wrote. It noted the district court's finding that Carpenter did not definitively know his job would be cut until some point while the sale was pending.

Twin City pointed to three cases in which courts had called similar pay-to-stay agreements "severance pay." The panel said each involved "a court merely referencing, and at best echoing, the term 'severance pay' as used in underlying litigation documents." It added that the policy's modifier "gilds the lily" and that the phrase "employment termination" "resolves any doubt."

Twin City also asked the court to reduce the damages. It argued that because Carpenter had already received post-judgment interest in his suit against Southwest, adding more in the federal judgment amounted to interest on interest and violated the purpose of 28 U.S.C. § 1961(a), the federal post-judgment interest statute. The panel declined to consider the statute's purpose because its text is plain: "Interest shall be allowed on any money judgment in a civil case recovered in a district court." Citing circuit precedent, it said such interest "is not discretionary."

The panel affirmed the district court's judgment in full, leaving the award to Carpenter's estate in place, including post-judgment interest on the entire underlying award. The court did not designate the opinion for publication, citing Fifth Circuit Rule 47.5.