Returning to its prior decisions addressing bad faith, the Texas Supreme Court sought to clarify when damages are available for bad faith despite there being no coverage under the policy. USAA Tex. Lloyds Co. v. Menchaca, 2017 Tex. Lexis 361 (Tex. Sup. Ct. April 7, 2017).
After Hurricane Ike struck Galveston Island in September 2008, Gali Menchaca contacted her homeowner's insurance company, USAA Texas Lloyds, and reported damage to her home. USAA sent an adjuster who found only minimal damage. USAA declined to pay Menchaca any benefits because the total estimated repair costs did not exceed the policy's deductible. A second USAA adjuster returned about five months later, but found no additional damage and USAA again failed to pay any policy benefits. Menchaca sued USAA for breach of the policy and for unfair settlement practices in violation of the Texas Insurance Code. For both claims, the damages sought were benefits under the policy and attorneys' fees and costs.
The jury answered three questions. Question 1 addressed the breach of contract claim and asked whether USAA failed "to comply with the terms of the policy with respect to the claims for damages by Ms. Menchaca." The jury answered "no." Question 2 asked whether USAA engaged in unfair or deceptive practices, including whether USAA refused "to pay a claim without conducting a reasonable investigation." The jury answered, "yes." The third question asked the jury to determine 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 Menchaca for the damages and the amount she was actually paid." The jury awarded $11,350.
Both parties moved for judgment in their favor based on the jury's verdict. The trial court disregarded Question 1 and entered final judgment in Menchaca's favor based on the jury's answers to Questions 2 and 3. The court of appeals affirmed.
On appeal, the Texas Supreme Court noted that the primary question was 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 policy. Generally, the answer was "no," but the issue was complicated and involved several related questions. The court looked back to its prior decisions and listed five distinct but interrelated rules that governed the relationship between contractual and extra-contractual claims in the insurance context.
First, as a general rule, an insured could not recover policy benefits as damages for an insurer's statutory violation if the policy did not provide the insured a right to receive those benefits. Here, Menchaca contended that she could recover policy benefits as damages resulting from USAA's statutory violation because that claim was independent from her claim for policy breach. The court rejected this argument. The Insurance Code only allowed an insured to recover actual damages "caused by" the insurer's statutory violation.
Under the second rule, an insured who established a right to receive benefits under the policy could recover those benefits as actual damages under the Insurance Code if the insurer's statutory violation caused the loss of benefits.
Third, even if the insured could not establish a present contractual right to policy benefits, the insured could 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 had previously recognized that an insurer who misrepresents that its policy provides coverage that it does not in fact provide could be liable under the statutes for such benefits if the insured was adversely affected or injured by its reliance on the misrepresentation.
Under the fourth rule, if an insurer's statutory violation caused an injury independent of the loss of benefits, the insured could recover damages for that injury even if the policy did not grant the insured a right to benefits. Consequently, 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.
Finally, the fifth rule provided that an insured could not 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.
Having established the five rules, the court remanded the case for a new trial. The trial court erred by disregarding the jury's answer to Question 1. Although USAA did not dispute that the policy provided "coverage" for some of Menchaca's damages, it provided evidence that the amount of her loss was less than the policy's deductible, and that evidence supported the jury's failure to find that USAA "failed to comply" with its obligations under the policy.