Texas Supreme Court Clarifies Extra-contractual Claims in Absence of Policy Breach in Lloyds Co. v. Menchaca Decision<April 18, 2017
The Texas Supreme Court (Court) has issued a decision in USAA Texas Lloyds Co. v. Gail Menchaca, Case No. 14-0721. On April 7, 2017, the Court ruled that the trial and appellate courts had erroneously upheld a jury’s award for extra-contractual damages despite findings that the insurer didn’t breach the insurance policy.
As part of this ruling, the Court:
- Provided a handful of “distinct but interrelated rules” to clarify the relationship between contractual and extra-contractual claims for first-party insurance claims
- Reversed the appellate court’s judgment, remanding “this case in the interest of justice for a new trial consistent with the rules [the Court has] clarified.”
Background: How the Claim Arose
In the aftermath of Hurricane Ike, the insured, Gail Menchaca (Menchaca), filed a wind damage claim with her homeowners’ insurance provider, USAA Texas Lloyds Company (USAA).
A USAA adjuster inspected Menchaca’s home and found that, while the loss was covered, the damages didn’t exceed the deductible. Specifically, the adjuster found that:
- The damages were minimal and totaled about $700, which was less than the $2,020 deductible.
- Menchaca’s damage repair estimates were at least $38,000 more than the adjuster’s damage repair estimate.
- Benefits should not be paid on the claim.
A second USAA adjuster confirmed the findings of the first adjuster. USAA denied payment of benefits for the claim.
The Trial Court Decision
Menchaca filed a lawsuit against USAA, alleging breach of contract and violation of Texas Insurance Code (TEXAS INSURANCE CODE)1 due to unfair settlement practice. After reviewing the arguments and evidence, the trial court jury found that
- USAA had not breached the terms of the policy.
- USAA had engaged in unfair settlement practices by denying the claim as a result of failing to conduct a reasonable investigation.
- Menchaca was entitled to $11,350, which was the difference “between the amount USAA should have paid Menchaca for her Hurricane Ike damages and the amount that was actually paid.”
The trial court disregarded the jury’s first finding as immaterial. On the basis of the second and third findings, a final judgment of $11,350 was awarded to Menchaca.
The Appellate Court Decision
USAA appealed the trial court’s ruling. Before the Court of Appeals of Texas, Thirteenth District, Corpus Christi, USAA alleged that the trial jury’s first finding – no breach of policy terms – was outcome determinative.
Menchaca rebutted this, alleging that USAA would have paid the policy benefits if it had conducted a thorough investigation into the claim (i.e., if USAA had not violated the TEXAS INSURANCE CODE).
The appellate court upheld the trial court’s ruling.
The Texas Supreme Court Ruling: Five New Rules to Guide New Trial
USAA filed another appeal to bring this case before the Texas Supreme Court. The Court agreed to hear this case, and oral arguments were presented before the Court in October 2016.
Summarizing about 30 years of Texas bad faith insurance law, the Court’s decision explains some subtle issues related to extra-contractual law and breach of contract claims (in the first-party context). This decision included clarification of the following five rules:
- General Rule: If a claim is not covered by the policy, a denial of that claim cannot be the basis of a bad faith insurance claim even if the insurer violated the TEXAS INSURANCE CODE – Citing Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), the Court affirmed that suing an insurance company for TEXAS INSURANCE CODE violations can only result in damages caused by those violations.
- The “Entitled-to-Benefits” Rule: If the insurer’s violation(s) of the TEXAS INSURANCE CODE caused the loss of benefits, the insured can recover those benefits as damages under the TEXAS INSURANCE CODE as long as the right to receive benefits under the policy can be proven – Citing Vail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129 (Tex. 1988), the Court explained that, under the TEXAS INSURANCE CODE, statutory damages are cumulative of other damages.
- The “Benefits-Lost” Rule: If the insurer’s violation(s) caused the insured to lose contractual rights, the insured can recover benefits as damages under the TEXAS INSURANCE CODE regardless of whether the insured can prove a current right to benefits – Citing Royal Globe Ins. Co. v. Bar Consultants, Inc., 577 S.W.2d 688 (Tex. 1979), Kennedy v. Sale, 689 S.W.2d 890 (Tex. 1985), and JAW the Pointe, LLC. v. Lexington Insurance Co., 460 S.W.3d 597 (Tex. 2015), the Court explained that:
Put simply, an insurer that commits a statutory violation that eliminates or reduces its contractual obligations cannot then avail itself of the general rule [that] waiver and estoppel cannot be used to re-write a policy so that it provides coverage it did not originally provide.
- The “Independent-Injury” Rule: If the insurer’s violation(s) are extreme enough to result in injury apart from the loss of benefits, the insured may be eligible for damages for that injury even if there are no rights to benefits under the policy – Citing Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430 (Tex. 2012) and Transportation Insurance Co. v. Moriel, 879 S.W.2d 10 (Tex. 1994), the Court clarified that:
[An] insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits.
- The “No-Recovery” Rule: If the insured did not have a right to benefits under the policy and (s)he did not sustain an independent injury due to the insurer’s violation(s), the insured cannot recover damages – Citing Castaneda and Lundstrom v. United Servs. Auto Ass’n — CIC, 192 S.W.3d 78 (Tex.App. – Houston [14th Dist.] 2006, pet. denied), the Court issued this final rule as a “natural corollary to the first four rules.”
Whether these rules will eliminate confusion in the retrial of USAA Texas Lloyds Co. v. Gail Menchaca remains to be seen.
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1: Complete text of Texas Insurance Code can be viewed here.