Menchaca Clarified Decades of Conflicting Case Law
USAA Lloyds v. Menchaca, a case recently decided by the Texas Supreme Court, sought to eliminate confusion regarding conflicting decisions about insureds’ claims against their insurance companies. The decision announced five rules about the relationship between insurance contract claims, which are claims against the insurance company for damages under the policy, and statutory claims under the Texas Insurance Code, which can give insureds additional damages.
Background: Gail Menchaca, Hurricane Ike, And USAA
Gail Menchaca’s home was damaged during Hurricane Ike in 2008. However, when she contacted her insurer, USAA, to report the claim they sent an adjuster who found minimal damages that did not exceed the policy’s deductible. Doubting this, Gail requested a second inspection, which rendered similar results, and USAA refused to pay Gail anything on her claim. Gail sued USAA to recover her policy benefits, costs, and attorney’s fees. She sued for breach of the policy and for unfair settlement practices and violations of the Texas Insurance Code. The jury found that USAA had fulfilled its obligations under the policy but that it still owed Gail $11,350 in damages plus $130,000 in attorney’s fees. This presented an interesting conflict in case law, which held both that Gail could recover at least her policy benefits under the Insurance Code, and that Gail could not recover under the code without a finding of a breach of the policy. The Court declared five rules in an attempt to reconcile its previous decisions.
The General Rule
The Court confirmed the general rule that an insured cannot recover policy benefits for an insurer’s statutory violation if the insured doesn’t have a right to those benefits in the first place. The insured must have actual damages caused by the statutory violation, and without coverage under the policy for the claimed damages there are no actual damages. If the policy does not cover the loss, there are no benefits to recover. However, there does not have to be an actual finding of breach of the policy to show the policy covered the loss and the insurer didn’t pay.
The Entitled-To-Benefits Rule
One of the most important clarifications in Menchaca was that an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as “actual damages” for a statutory violation. The benefit to recovery under the statute is that an insured may recover additional penalties such as interest on their claim and attorney’s fees. We are currently handling a case before the Texas Supreme Court, Barbara Technologies Corp. v. State Farm Lloyds, which will further clarify whether statutory penalties survive payment of an appraisal.
The Benefits-Lost Rule
The third rule recognizes an insured’s right to recover benefits under the policy for a statutory violation, even if there is no coverage for the claimed damage, if the insurer’s conduct caused the insured to not have that coverage. For example, if an insurer misrepresents that a policy covers wind damage, and the insured relies on that representation to buy the policy, but the policy does not actually cover wind damage—under the benefits-lost rule, the insurer’s misrepresentation caused the insured to not have benefits it reasonably thought it had. Therefore, the insured can still recover benefits for wind damage as actual damages for a statutory violation under the benefits-lost rule.
The Independent-Injury Rule
Menchaca clarified the two aspects of the independent injury rule. First, 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 the injury even if the policy does not entitle the insured to receive benefits. However, when an insured seeks to recover damages that flow from denial of the policy benefits, the general rule applies and precludes recovery unless the insured is entitled to policy benefits. Second, an insurer’s statutory violations don’t permit the insured to recover actual damages beyond the policy benefits unless the violation causes an injury that is independent from the loss of benefits.
The No-Recovery Rule
Under this rule, a corollary to the other four, 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 the right to receive benefits.
Barbara Technologies And The Unanswered Question in Appraisal Cases
A question still to be answered—perhaps in our Barbara Technologies case, which is currently pending before the Court—is whether in a case where a valid claim is rejected and then appraisal is invoked and paid, can the insured still recover statutory prompt payment penalties under Section 542 of the Texas Insurance Code. The holding in Menchaca— particularly the entitled to benefits rule— seems to suggest an affirmative answer, but another line of appraisal cases hold that nothing further can be recovered when an appraisal provided for in the contract is conducted and the award is paid in full. However, without the statutory penalties in the Insurance Code an insurer has no incentive to promptly settle or pay claims; the insurer can just wait months or years to invoke the appraisal provision and then be exonerated from paying interest and attorney’s fees on the claim. Hopefully, the Court will continue to recognize the rights of insured Texans who are being wrongfully abused by their insurance companies, and provide the statutory benefits the Legislature enacted to help prevent wrongful treatment of insureds in all cases where the insurer violated the statute.
Insured’s Who Are Not Timely Paid In Full Can Recover Statutory Penalties