5 rules of insurance bad faith, according to the Texas Supreme Court.
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The Texas Supreme Court has issued a decision setting forth five rules about statutory bad faith under the state's Insurance Code.
After Hurricane Ike struck Galveston Island in September 2008, Gail Menchaca contacted her homeowner's insurance company, USAA Texas Lloyds Co., and reported that the storm had damaged her home. USAA sent an adjuster to investigate Ms. Menchaca's claim, and the adjuster found only minimal damage.
Repair costs didn't exceed policy's deductible
Based on the adjuster's findings, USAA determined that its policy covered some of the damage but declined to pay Ms. Menchaca any benefits because the total estimated repair costs did not exceed the policy's deductible.
About five months later, at Ms. Menchaca's request, USAA sent another adjuster to re-inspect the property. This adjuster generally confirmed the first adjuster's findings, and USAA again refused to pay any policy benefits.
Sued for breach of insurance policy
Ms. Menchaca sued USAA for breach of the insurance policy and for unfair settlement practices in violation of the Texas Insurance Code. As damages for both claims, she sought only insurance benefits under the policy, plus court costs and attorneys' fees.
The parties tried the case to a jury.
Question 1 of the jury charge, which addressed Ms. Menchaca's breach-of-contract claim, asked whether USAA had failed "to comply with the terms of the insurance policy with respect to the claim for damages filed by Ms. Menchaca resulting from Hurricane Ike." The jury answered "No."
Question 2, which addressed Ms. Menchaca's statutory claims, asked whether USAA had engaged in various unfair or deceptive practices, including whether USAA had refused "to pay a claim without conducting a reasonable investigation with respect to" that claim. As to that specific practice, the jury answered "Yes."
Question 3 asked the jury to determine Ms. Menchaca's damages that resulted from either USAA's failure to comply with the policy or its statutory violations, calculated as "the difference, if any, between the amount USAA should have paid Gail Menchaca for her Hurricane Ike damages and the amount that was actually paid." The jury answered "$11,350."
Both parties moved for judgment in their favor based on the jury's verdict.
Insured's loss of benefits
The court of appeals affirmed, and the dispute reached the Texas Supreme Court, where the primary issue was whether an insured could recover policy benefits based on jury findings that the insurer had violated the Texas Insurance Code and that the violation had resulted in the insured's loss of benefits the insurer "should have paid" under the policy, even though the jury also failed to find that the insurer had failed to comply with its obligations under the policy.
The Texas Supreme Court reversed the court of appeals' judgment and remanded the case to the trial court for a new trial.
5 rules of insurance bad faith
In its decision, the court set forth five rules addressing the relationship between contract claims under an insurance policy and tort claims under the Texas Insurance Code.
Related: Massachusetts top court limits bad faith awards against insurers
First, the court said, 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. That was because, the court explained, the Insurance Code only allows an insured to recover actual damages "caused by" the insurer's statutory violation.
Second, the court continued, 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. The court pointed out that this rule was a corollary to the first rule.
Third, the court added, 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. The court noted that it previously had recognized this principle in the context of claims alleging that an insurer had misrepresented a policy's coverage, had waived its right to deny coverage or had been estopped from doing so, or had committed a violation that caused the insured to lose a contractual right to benefits that it otherwise would have had.
Fourth, according to the court, 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 court said that this rule derived from the fact that an insurer's extra-contractual liability was "distinct" from its liability for benefits under the insurance policy. Therefore, the court reasoned, if an insurer's statutory violation caused an injury independent of the insured's right to recover policy benefits, the insured could recover damages for that injury even if the policy did not entitle the insured to receive benefits. Moreover, the court added, an insurer's statutory violation did not permit the insured to recover any damages beyond policy benefits unless the violation caused an injury that was independent from the loss of the benefits.
And fifth, the court concluded, 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 had sustained no injury independent of a right to benefits.
Applying these rules to Ms. Menchaca's action against USAA, the court determined that the trial court had erred by disregarding the jury's answer to Question 1 because it was "neither unsupported by the evidence nor immaterial."
Confusion required a new trial
The court decided that, because of the confusion that required the court to state the five rules, it was "proper to remand the case for a new trial in the interest of justice."
The case is USAA Texas Lloyds Co. v. Menchaca, No. 14-0721 (Tex. April 7, 2017).
S teven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at email@example.com.
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|Publication:||Property and Casualty 360|
|Date:||Apr 28, 2017|
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