By: Sean Mahoney
On December 15th, the Texas Supreme Court agreed to revisit its April 7, 2017 decision in USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, a “bad faith” case arising out of Hurricane Ike damage, in which the court held that a policyholder could potentially recover policy benefits for statutory bad faith under Texas law, even though a jury concluded that the insurer did not breach the terms of the policy, if the policyholder could show that she was nevertheless entitled to the benefit. The decision to rehear this matter comes at the urging of insurers and interested groups, including the Insurance Council of Texas and the U.S. Chamber of Commerce, who argued that the April 7, 2017 ruling substantially unsettled Texas insurance law.
Menchaca is a first-party property insurance coverage case. After Hurricane Ike struck in 2008, plaintiff Menchaca submitted a claim under her homeowners policy to USAA. A USAA adjuster later concluded that Menchaca’s property suffered only “minimal damage” that fell below the deductible. Menchaca sued claiming breach of contract and unfair claims settlement practices in violation of the Texas Insurance Code. As damages, she sought only the policy benefit, court costs, and attorneys’ fees.
At trial, the jury concluded that USAA did not fail to comply with the terms of the policy. The jury was also asked whether USAA engaged in unfair or deceptive practices, such as refusing to pay Menchaca’s claim without a reasonable investigation. The jury answered “Yes” to that question and awarded Menchaca approximately $11,000 in damages. USAA argued that Menchaca could not recover this amount as extra-contractual, bad faith damages because the jury had separately concluded that USAA did not breach the policy.
Prior to the Menchaca decision, there was conflicting Texas Supreme Court precedent as to whether an insured could recover policy benefits as a result of unfair settlement practices. Compare Provident American Ins. Co. v. Castañeda, 988 S.W.2d 189 (Tex. 1998) (benefits not recoverable) with Vail v. Texas Farm Bureau Mut. Ins. Co., 75 S.W.2d 129 (Tex. 1988) (holding that damages for insurer’s wrongful refusal to pay are at least equal to the policy benefit). In an attempt to settle this confusion, the Texas Supreme Court in Menchaca distilled the following five rules from its prior precedent:
- In general, an insured cannot recover policy benefits as damages for an insurer’s statutory violation if the policy does not provide the insured the right to receive those benefits;
- an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as actual damages under the Texas Insurance Code if the insurer’s statutory violation causes the loss of benefits;
- even if an insured cannot establish a contractual right to the policy benefit, the insured can still recover the policy benefit under the Texas Insurance Code if the insurer’s statutory violation caused the insured to lose the contractual right;
- if an insurer’s statutory violation causes an injury independent of the loss of policy benefits, the insured may recover damages for that injury even if the policy does not grant the insured a right to benefits; and
- an insured cannot recover damages based upon 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.
Ultimately, the court remanded the case for a new trial but held that Menchaca did not have to prevail on her breach of contract claim to recover policy benefits for a statutory violation, even though, as USAA argued in its motion for rehearing, the court seemed to reject Menchaca’s argument that her statutory violation and breach of contract claims were independent of one another. USAA also argued that the court drew an artificial distinction between an insured’s proof of “entitlement to benefits” under a policy and the insurer’s breach of the policy provisions, which it contends are essentially identical.
The U.S. Chamber of Commerce filed an amicus brief arguing in part that application of the five rules the court announced should have resulted in a “take-nothing judgment,” because the jury concluded that there was no breach of the policy and Menchaca sought no other damages. An insurer also asked the court to clarify whether (1) Menchaca means that insureds can obtain extra-contractual damages, such as punitive damages, mental anguish damages, and attorneys’ fees, when the only harm is a loss of policy benefits; and (2) the five rules apply to liability insurance policies.
The Texas Supreme Court’s decision to rehear Menchaca will hopefully lead to answers to at least some of these questions.