The Supreme Court of Texas has recently answered the question of when, if ever, statutory penalties are available in contract actions for recovery of policy benefits. In USAA Texas Lloyds Co. v. Gail Menchaca, the Supreme Court determined that statutory recovery can be cumulative of contractual recovery in specific instances.
Hurricane Ike damaged Gail Menchaca’s home. Menchaca contacted her insurance carrier, USAA Texas Lloyds Co. USAA refused to pay for damages since it was determined that her home’s damages were minimal and the damage’s repair costs did not exceed the policy’s deductible. After a request for inspection, a second adjuster confirmed USAA’s determination. Menchaca sued for breach of contract and for unfair settlement practices. She sought damages in insurance benefits under the policy, court costs, and attorney’s fees.
At trial, the jury concluded that USAA did not fail to comply with the terms of the policy. However, the jury found that USAA failed to pay a claim without a reasonable investigation of the claim and awarded Menchaca $11,350.00, the difference between the amount USAA should have paid Menchaca for the damages and the amount they actually paid her. USAA appealed arguing that since the jury concluded that it did not fail to comply with the terms of the policy then Menchaca should not recover for bad faith or extra-contractual liability. The court of appeals affirmed the lower court’s judgment.
On appeal, the Supreme Court examined 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. The Court held that an insured (1) cannot recover actual damages if he or she had no rights under the benefits of the policy and (2) who establishes a right to receive benefits under an insurance policy can recover those benefits as actual damages under the statute if the insurer’s statutory violation causes the loss of the benefits.
The Court recognized that an insured can recover benefits as actual damages even if the insured has no right to those benefits under the policy, if the insurer’s conduct caused the insured to lose that contractual right. The Court also held that an insurer’s extra-contractual liability is “distinct” from its liability for benefits under the insurance policy. Finally, the Court acknowledged that an insured cannot recover any damages based on an insurer’s statutory violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits. In this case, the Court agreed that that the jury finding that USAA did not fail to comply with the terms of the policy directly conflicted with the finding that USAA did fail to pay a claim; therefore, as a matter of clarification and in the interest of justice, the judgment was reversed and remanded.
Based on Menchaca, in order to recover statutory damages from a policy obligation there are a five rules to consider in determining whether damages will be awarded:
· The general rule is that an insured cannot recover policy benefits for an insurer’s statutory violation if the insured does not have a contractual right to those benefits under the policy.
· An insured who establishes a right to receive benefits under an insurance policy can recover those benefits as “actual damages” under the statute if the insurer’s statutory violation causes the loss of the benefits.
· An insured can recover benefits as actual damages under the Insurance Code even if the insured has no right to those benefits under the policy, if the insurer’s conduct caused the insured to lose that contractual right.
· An insurer’s extra-contractual liability is “distinct” from its liability for benefits under the insurance policy.
· An insured cannot recover any damages based on an insurer’s statutory violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits.
Since the delivery of this opinion on April 13, 2018, several courts, including the 5th Circuit, have already considered the implication and application of these rules, and it is likely that many more will follow.
Aldous v. Darwin Nat’l Assur. Co., No. 16-10537, 2018 U.S. App. Lexis 12382 (5th Cir. May 11, 2018) (noting that the Court’s ruling in Menchaca “repudiated the independent-injury rule” of Parkans International LLC v. Zurich Insurance Co.)
