The Underlying Case
The dispute began almost a decade ago, in September of 2008. After Hurricane Ike hit Galveston, homeowner Gail Menchaca filed a claim with her homeowners’ insurance carrier, USAA Texas Lloyds Company, for damage to her property. Over the course of the following five months, two different adjusters inspected the property and found only minimal damage – the total for which did not exceed her deductible. After both inspections, USAA declined to pay Menchaca any benefits under her policy. Menchaca filed suit against USAA for breach of contract and violations of the Texas Insurance Code. After trial on the merits, the jury’s seemingly contradictory verdict set the stage for a prolonged court battle.
On one hand, the jury found that USAA did not fail to comply with the terms of its policy. On the other hand, the jury found that USAA refused to pay policy benefits without conducting a reasonable investigation of Menchaca’s claim. The jury assessed damages for policy benefits in the amount of $11,350.00, and attorneys’ fees in the amount of $130,000.00. After the jury verdict, both USAA and Menchaca moved for a judgment in their favor. USAA argued that because the jury found it did not fail to comply with the terms of the policy, Menchaca could not recover for bad faith or extra-contractual liability as a matter of law. The trial court disregarded the jury’s finding that there was no policy violation, and entered final judgment in favor of Menchaca based on the failure to conduct a reasonable investigation. On appeal, the judgment was affirmed, and USAA petitioned for a review by the Texas Supreme Court. USAA framed the issues for the Court as follows:
1. When a jury rejects an insured’s claim that her insurer breached its contract, is the insured precluded from recovering on an extra-contractual claim?
2. When a jury rejects an insured’s claim that her insurer breached its policy, can the insured nevertheless recover policy benefits if the same jury finds fault with the insurer’s investigation?
Menchaca: Take One
In their arguments, Menchaca and USAA relied primarily on competing authorities from the Texas Supreme Court – USAA on Provident American Ins. Co. v. Castañeda, 988 S.W.2d 189 (Tex. 1998), and Menchaca on Vail v. Texas Farm Bureau Mutual Ins. Co., 754 S.W.2d 129, 130 (Tex. 1988). USAA argued that the trial court judgment and appellate affirmation were directly contradictory to Castañeda, which held an insured cannot recover policy benefits for a violations of the unfair settlement practices provisions in the Texas Insurance Code. Menchaca pointed out that the same argument was advanced by the insurer in Vail, and the Texas Supreme Court expressly rejected the argument by holding policy benefits were recoverable as actual damages under the Texas Insurance Code.
In a lengthy April 7, 2017 opinion written by Justice Jeffrey Boyd, it was noted that both arguments advanced by the parties were incorrect. The Court acknowledged that prior Texas Supreme Court precedent (such as Vail and Castañeda) led to “substantial confusion” with regard to the questions at issue. According to Justice Boyd, the main question in this case was “whether an insured can recover policy benefits as actual damages caused by an insurer’s statutory violation absent a finding that the insured had a contractual right to the benefits under the policy.” By way of an answer, the Court set forth five rules intended to clarify the “substantial confusion” in this area of the law. The rules can be adequately summarized as follows:
1. 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.
2. Entitled to Benefits Rule: An insured who establishes a right to receive benefits under the insurance policy can recover those benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of benefits.
3. Benefits-Lost Rule: Even if the insured cannot establish a present contractual right to policy benefits, the insured can recover benefits as actual damages under the Insurance Code if the insurer’s statutory violation caused the insured to lose that contractual right.
4. Independent Injury Rule: 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.
5. No-Recovery Rule: 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.
The Court remanded the case for a new trial with these five rules providing substantive guidance. It is important to note that the Court specifically emphasized that neither party invoked appraisal, thus arguably Texas case law regarding ending bad faith disputes through timely payment of an appraisal award remains intact.
Menchaca: Take Two
As the dust settled, the insurance world was left questioning whether the Menchaca decision had achieved its stated purpose of providing clarity. USAA urged the Court to grant rehearing, arguing that its opinion in Menchaca “unsettled” established bad faith jurisprudence in Texas. Further evidencing the widespread concern over the perceived inconsistencies of the Court’s holding in Menchaca, numerous business and insurance-related entities filed amicus briefs in support of rehearing, including Insurance Council of Texas, Lexington Insurance Company, and United States Chamber of Commerce. Notably, in its brief, Lexington asked the Court to clarify the following: (1) whether Menchaca means that insured can obtain extra-contractual damages (i.e., punitive damages, attorneys’ fees, etc.) when the only harm is loss of policy benefits; and (2) whether the holding in Menchaca also applies to third-party liability policies. The potential extension of Menchaca into third-party liability cases would be significant for insurers writing in the State of Texas. As USAA states in its motion for rehearing, the Texas Supreme Court in Menchaca has undertaken a “monumental task: harmonizing decades of bad-faith jurisprudence.” Perhaps the second time’s the charm for the Court.
Click here to read USAA’s Amended Motion for Rehearing.
Click here to read Lexington Insurance Company’s Amicus Brief in Support of Rehearing.
Click here to read Chamber of Commerce of the United States of America’s Amicus Brief in Support of Rehearing.
Click here to read Insurance Council of Texas’s Amicus Brief in Support of Rehearing.
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The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to bad faith claims and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.