Texas Supreme Court Analysis of USAA v. Menchaca

Background

USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, on petition for review from the Court of Appeals for the Thirteenth District of Texas, was argued on October 11, 2016 and decided on April 7, 2017.[1]

After Hurricane Ike struck in September 2008, Gail Menchaca contacted her homeowner’s insurance company, USAA Texas Lloyds (“USAA”), to report damage to her home.  Upon investigation, USAA’s adjuster found only minimal damage.  USAA determined its policy covered some of the damage, but declined to pay Menchaca any benefits because the total estimated repair costs did not exceed the policy’s deductible. About five months later, at Menchaca’s request, USAA sent another adjuster to re-inspect the property.  This adjuster confirmed the first adjuster’s findings, and USAA again refused to pay any policy benefits.

Menchaca sued USAA for (1) breach of the insurance policy, and (2) unfair settlement practices in violation of the Texas Insurance Code.  As damages for both claims, she sought only insurance benefits under the policy.  The jury found USAA not liable under Plaintiff’s breach-of-contract claim, but found USAA liable under Plaintiff’s statutory claim by refusing to pay a claim without conducting a reasonable investigation.  Menchaca was awarded $11,350 in actual damages.

Both parties moved for judgment in their favor based on the jury’s verdict.  USAA relied on precedent stating an insurance company’s “failure to properly investigate a claim is not a basis for obtaining policy benefits,”[2] while Menchaca relied on precedent stating an insurer’s “unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.”[3]  The trial court entered final judgment in Menchaca’s favor and the court of appeals affirmed.

Texas Supreme Court Analysis

First, the Texas Supreme Court distinguished two independent causes of action; one in contract and one in tort.[4]  Then, the Court established five rules to clarify the relationship between breach of contract claims and extra-contractual claims in tort.

Five Rules:

In response to precedential confusion relied on by both insurer and insured in this case, the Texas Supreme Court prescribed the following rules:

  1. The 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. The Entitled-to Benefits Rule: An insured who establishes a right to receive benefits under the policy can recover those benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of the benefits.

  3. The Benefits-Lost Rule: An insured can recover benefits as actual damages under the Insurance Code even if the insured has no contractual right to those benefits if the insurer’s conduct caused the insured to lose that right.

  4. The Independent Injury Rule: If an insurer’s statutory violation causes an injury independent of the insured’s right to recover policy benefits, the insured may recover damages for that injury even if the insured is not entitled to receive benefits under the policy.

  5. But if the policy does entitle the insured to benefits, the insurer’s statutory violation does not permit the insured to recover any actual damages beyond those policy benefits unless the violation causes an injury that is independent from the loss of the benefits.

  6. The 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.

Ultimately, the Texas Supreme Court remanded the case to be properly adjudicated under the new, unmuddied rules of damages.

Conclusion

An insured cannot recover policy benefits as actual damages for an insurer’s statutory violation if the insured does not have a right to those benefits under the policy.  Moreover, an insurer's violation of a duty to timely investigate a claim does not provide an exception to the general rule.  Absent a breach of contract, no insured can recover tort damages from policy benefits.  The Menchaca holding creates clear protections for insurance companies and their ability to rightfully deny claims.  Void of such a right, insurance companies would reduce coverage in fears of open-ended liability in both contract and tort, consequentially limiting consumers from acquiring insurance.

Avoiding such uneconomic results, the Menchaca court established firm and unambiguous guidelines for Texas courts to properly award damages in dual claims in contract and tort.  These bright line rules weigh heavily in favor of insurance companies as they state specific and rare instances in which an insured may reach into policy benefits under a tort claim.  With the law on its side and undeniable precedential clarity, the insurance industry may proceed in efficient, fair business practices.


[1] USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752 (Tex. Apr. 7, 2017).

[2] Provident Am. Ins. Co. v. Castañeda, 988 S.W.2d 189, 198 (Tex. 1998).

[3] Vail v. Tex. Farm Bureau Mut. Ins. Co., 754 S.W.2d 129, 136 (Tex. 1988).

[4] Liberty Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996).

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