Insurance Update -- Can An Insured Recover Policy Benefits As Damages For An Insurer’s Statutory Violation If The Policy Does Not Expressly Provide The Right To Receive Those Benefits?
The Texas Supreme Court recently answered this question in USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752 (Tex. Apr. 7, 2017).
Gail Menchaca contacted USAA, her homeowner’s insurance company, after a hurricane damaged her home. USAA sent an adjuster to inspect the property, but the adjuster found only minimal damage. Since the repair estimate was lower than Menchaca’s deductible, USAA declined to pay the claim. Menchaca sued USAA for breach of the insurance policy and unfair claim settlement practices in violation of the Texas Insurance Code. The case was tried to a jury.
Question 1 of the jury charge addressed the breach of contract claim and asked whether USAA failed to “comply” with the terms of the insurance policy with respect to Menchaca's claim for damages. The jury answered “No.” Question 2, which addressed Menchaca’s claims for violations of the Texas Insurance Code, asked whether USAA engaged in various unfair or deceptive practices, including whether USAA refused to pay a claim without conducting a reasonable investigation with respect to that claim. The jury answered “Yes.” Question 3 asked the jury to determine Menchaca’s damages that resulted from either USAA’s failure to comply with the policy or its statutory violations. The calculation of damages was determined as the difference, if any, between the amount USAA should have paid Menchaca and the amount actually paid. The jury awarded Menchaca $11,350.00.
After the jury entered its verdict, both parties moved for judgment in their favor notwithstanding the verdict. USAA argued that because the jury failed to answer Question 1 in the affirmative and find that USAA failed to comply with the policy’s terms, Menchaca could not recover for the unfair claims settlement practice the jury found. Menchaca argued the court should enter judgment in her favor based on the jury’s answers to Questions 2 and 3, neither of which were conditioned on a “Yes” answer to Question 1. The trial court disregarded Question 1 and entered judgment in Menchaca’s favor. Thereafter, the court of appeals affirmed and USAA appealed to the Texas Supreme Court.
Texas Supreme Court Holding
USAA’s Petition for Review was granted to answer the following question: "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 insurance policy?" Generally the answer is no, but the court stated many courts and other commentators have expressed confusion over the issue and, therefore, the issue required clarification and guidance from the court. In an effort to clarify the issue, the court examined several interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context. Each of these rules is discussed below:
- First, the court examined the general rule which states, 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 the benefits at issue;
- Second, the court looked at the rule that states, 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 the benefits;
- Third, the court looked at the rule that 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 the applicable contractual right;
- Fourth, 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
- Fifth, 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.
After applying these newly enunciated rules, the Texas Supreme Court clarified than 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 the applicable benefits. Further, the court stated the trial court erred by disregarding the jury’s answer to Question 1, and the court of appeals erred by affirming the trial court’s judgment. In light of the confusion that the court’s precedent caused in this litigation and appeal of the case, the court reversed the court of appeals' judgment and remanded the case in the interest of justice for a new trial consistent with the rules the court set out.
The takeaway is that the Texas Supreme Court continues to strictly construe the terms of insurance policies and is reluctant to provide for any form of recovery that arguably goes beyond on the scope of the agreement between the insured and insurer.