In USAA Texas Lloyds Company v. Menchaca, Cause No. 14-0721 (Tex.2018), the Texas Supreme Court replaced its prior 2017 opinion. On rehearing, the Court held that, where there has been no breach of the insurance policy, generally, extra-contractual causes of action are not available.
In articulating five separate rules, the Texas Supreme Court focused on the nexus between the alleged misconduct and the alleged damages, clarifying the procedural steps a court should follow in determining which rule and damages apply.
After Hurricane Ike, Gail Menchaca (Menchaca) submitted a claim for damage to her property insurer USAA Texas Lloyds Company (USAA). USAA's investigation concluded Menchaca suffered damages as a result of the hurricane, but the damages were less than Menchaca's deductible and made no payment. Menchaca filed suit alleging USAA breached its policy obligations by not paying the full extent of her loss.
After trial, the jury returned a verdict finding (1) USAA did not breach its policy obligations; (2) USAA refused to pay a claim without conducting a reasonable investigation; and (3) Menchaca's damages totaled $11,350. Both Menchaca and USAA argued the jury verdict was clear and requested the judgment be entered in their respective favor. The trial court ultimately entered judgment in favor of Menchaca.
The Texas Supreme Court concluded unanimously that statutory bad faith claims could exist in the absence of a carrier's breach of its policy obligations, and also concluded that the trial court erred in disregarding the jury finding of no breach by USAA.
However, the Court was not unanimous in the procedural effect of applying to the actual jury findings the five rules applicable to a breach of contract with extra-contractual claims. Three of the seven justices, with one abstention, found in favor of USAA consistent with the jury. For the remaining justices, the jury verdict contained a fatal contradiction that ultimately required a remand to the trial court for a new trial. Thus, the Court remanded the case to the trial court.
The Five Rules
In reaching its holding that a claim for statutory bad faith could exist independently of an actual breach of the policy obligations, the Court sought to "provide clarity regarding the relationship between claims for an insurance-policy breach and Insurance Code violations." In doing so, the Court announced "five distinct but interrelated rules govern the relationship between contractual and extra-contractual claims in the insurance context."
First, the Texas Supreme Court stated, as a general rule, "an insured cannot recover policy benefits as damages for an insurer's statutory violation if the policy does not provide the insured a right to receive those benefits."
Second, where a policyholder secures a finding that a carrier did fail to pay benefits as required under a policy, the policy holder can recover both damages for the carrier's breach of its policy obligations and damages where bad faith conduct caused the insurer to breach its obligations under a policy.
Third, the 'Benefits-Lost' Rule provides that a policyholder can recover policy benefits as actual damages "if the insurer's statutory violation caused the insured to lose" its rights under the policy.
Fourth, an insurer can be liable for damages when its conduct causes a policyholder to suffer damage independent of the loss of policy benefits. The independent injury must be distinct from the claimed policy benefit. Such an injury could be mental anguish, so long as injury flowed from the insurer's conduct, and not simply from the denial of a claim. Of note, the Court has yet to encounter a successful independent injury claim.
Finally, "an insured cannot recover any damages based on an insurer's statutory violation if the insured had no right to receive benefits under the policy and sustained no injury independent of a right to benefits."
Menchaca removes some of the confusion created by the original opinion issued by the Texas Supreme Court but leaves open other questions. It is unclear whether this opinion applies only to first-party claims, or also encompasses third-party matters.
Insurers and practitioners faced with statutory bad faith claims are encouraged to examine closely the nexus between the alleged improper conduct and the alleged damages suffered to determine which rule applies to the given fact pattern, and to scrutinize carefully the charge and questions submitted to a jury to ensure they follow the pronouncements set forth in Menchaca.
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