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.”
“Actual damages” under the code include “benefit-of-the-bargain” damages representing “the difference between the value as represented and the value received,” according to the ruling. But it notes that the code does not create insurance coverage or a right to benefits that does not otherwise exist under each policy.
The opinion moves on to the central question in USAA v. Menchaca, which is whether an insured can recover policy benefits as actual damages caused by an insurer’s statutory violation without a finding that the insured had a contractual right to the benefits.
“Generally, the answer to this question is ‘no,’ but the issue is complicated and involves several related questions,” Boyd wrote.
To clarify these issues, the Texas Supreme Court announced five distinct but interrelated rules that govern the relationship between contractual and extra-contractual insurance claims.
“First, as a 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,” the opinion states. “Second, 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.”
Justice Boyd continued, “Third, 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 that 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,” the ruling states.
The fifth rule states that “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.” (Emphasis in original.)
Each of the rules is discussed in depth on the basis of earlier court precedent. The opinion then returns to Menchaca’s lawsuit and analyzes her claims in the context of the five new rules.
The Texas Supreme Court sided with USAA last week and rejected Menchaca’s claim based on the first rule.
“Menchaca contends that she can recover policy benefits as damages resulting from USAA’s statutory violation because that claim is independent from her claim for policy breach,” the ruling states. “The reason we reject Menchaca’s independent-claims argument—indeed, the very reason for the general rule—derives from the fact that the Insurance Code only allows an insured to recover actual damages ‘caused by’ the insurer’s statutory violation.”
Justice Boyd also agreed with USAA that the trial court improperly disregarded the jury’s answer to Question 1 to resolve the dispute.
“Instead of considering how to address and resolve the conflict, however, the court decided to disregard Question 1 because it found the question to be ‘poorly worded’ and ‘incomprehensible,’” he wrote.
Boyd continued, “We conclude that the trial court erred by disregarding the jury’s answer to Question 1. ‘A trial court may disregard a jury finding only if it is unsupported by evidence . . . or if the issue is immaterial.’ Contrary to the court of appeals’ conclusion, the fact that the court cannot determine the reasons for a jury’s answer does not permit the court to disregard that answer. Here, the jury’s answer to Question 1 was neither unsupported by the evidence nor immaterial.”
The Texas Supreme Court reversed the lower court and remanded for a new trial.
“In light of the parties’ obvious and understandable confusion over our relevant precedent and the effect of that confusion on their arguments in this case, we conclude that a remand is necessary here in the interest of justice,” Boyd said.
A date for the new trial has not yet been set.
Insurance attorney Peri Alkas of Phelps Dunbar told Courthouse News, “I think we will see an increase in the number of extra-contractual claims that the policyholders’ bar will bring.” She said there will be less predictability in how lower courts will construe these clarifying rules.
Texas Watch, a citizen advocacy organization, is currently fighting the pending bills SB 10 and HB 1774 in the Texas Legislature. These so-called “blue tarp bills” would lessen penalties for insurers that deny, delay and underpay the claims of Texas families and businesses, the group claims.
Ware Wendell, executive director of Texas Watch, said in a statement, “The Supreme Court has spoken, providing clarity and bright-line rules for insurers and policyholders. There is no rationale for HB 1774 and SB 10. The state of the law is now settled.”