AUSTIN, Texas (CN) — The Texas Supreme Court tried to clear up “substantial confusion” in state courts by issuing five rules that address contractual claims under an insurance policy versus tort claims under the state insurance code.
The court announced the new rules concurrent with its April 7 opinion for an insurance coverage dispute in USAA Texas Lloyds Company v. Gail Menchaca. It said the case typifies the confusion in Texas courts over such lawsuits.
Menchaca originally sued USAA in 2009 in Montgomery County District Court for an alleged breach of her insurance policy and unfair settlement practices after it denied her claim for property damage from Hurricane Ike. The storm struck Galveston Island in September 2008.
The jury’s verdict in Menchaca’s case was confusing due to its answers to critical questions. For Question 1, the jury said “no” as to whether USAA failed to comply with the terms of the insurance policy with respect to her claim for damages. But as to whether USAA engaged in unfair or deceptive practices and refused to pay her claim without conducting a reasonable investigation, the jury said “yes.”
The jury found that USAA should have paid Menchaca $11,350 for her Hurricane Ike damages.
After the verdict, both parties sought judgment in their favor. USAA said that because the jury answered “no” to Question 1, Menchaca should not recover damages for bad faith or extra-contractual liability.
Menchaca argued that the court should enter judgment in her favor based on the jury’s answers to the other questions, neither of which was conditioned on a “yes” answer to Question 1.
The trial court disregarded Question 1 and entered final judgment in Menchaca’s favor because of the jury’s answers to Questions 2 and 3. The appeals court affirmed, and USAA petitioned for a review by the Texas Supreme Court.
In Justice Jeffrey Boyd’s 37-page opinion, he noted his court’s prior rulings on which USAA and Menchaca based their arguments, as well as the confusion expressed by courts “over our decisions in this area.”
He said Menchaca’s case was a chance to “provide clarity regarding the relationship between claims for an insurance policy breach and Insurance Code violations.”
Boyd began by looking at the underlying governing principles of insurance in Texas.
“The first of these principles is that an ‘insurance policy is a contract’ that sets forth the respective rights and obligations to which an insurer and its insured have mutually agreed… An insurance policy, however, is a unique type of contract because an insurer generally ‘has exclusive control over the evaluation, processing[,] and denial of claims,’ and it can easily use that control to take advantage of its insured,” the judge wrote. “Because of this inherent ‘unequal bargaining power,’ we concluded in [1987’s Arnold v. Nat’l Cty. Mut. Fire Ins. Co.] that the ‘special relationship’ between an insurer and insured justifies the imposition of a common-law duty on insurers to ‘deal fairly and in good faith with their insureds.'”
The opinion notes the role of the Texas Insurance Code, which “supplements the parties’ contractual rights and obligations by imposing procedural requirements that govern the manner in which insurers review and resolve an insured’s claim for policy benefits.”