On April 7, 2017, the Supreme Court of Texas delivered its opinion, via Justice Boyd, in the case of USAA Texas Lloyds Company v. Gail Menchaca, No. 14-0721. At the trial level, the jury found that USAA complied with the terms of the insurance policy but violated the Texas Insurance Code, as it engaged in unfair or deceptive practices by refusing to pay a claim without conducting a reasonable investigation. Menchaca was awarded $11,350 for actual damages due to USAA’s unfair or deceptive practices. USAA moved for a post-judgment verdict arguing that Menchaca could not recover damages based on the jury’s finding of a statutory violation, because the jury found no breach of the policy. The trial court denied USAA’s motion. The Court of Appeals for the 13th District of Texas affirmed the trial court. The Texas Supreme Court recognized there was “substantial confusion” of its precedent regarding recovery of damages under statutory violations, and such confusion “permeated this case.” In an effort to provide clarity, the Court announced five rules to address the relationship between contract claims under an insurance policy and tort claims under the Insurance Code. Because the trial court and parties lacked the benefit of the clarity provided in the opinion, the Texas Supreme Court reversed the 13th Court of Appeals and remanded the case for a new trial.
The five rules summarized below provide the Supreme Court’s clarification relating to the utilization of policy benefits as a basis for actual damages, in claims of statutory violations of the Insurance Code:
The “General Rule” provides no recovery to the insured for policy benefits as damages for an insurer’s statutory violation, if the insured does not have a contractual right to those benefits. This rule derives from the fact that the Insurance Code only allows an insured to recover actual damages caused by the insurer’s statutory violation.
The “Entitled-to-Benefits-Rule” provides recovery to the insured of policy benefits as damages when the insured establishes a right to receive benefits under an insurance policy and the insurer’s statutory violation causes the loss of the benefits.
The “Benefits-Lost Rule” provides recovery of policy benefits as damages under the Insurance Code, even if an insured cannot establish a contractual right to policy benefits, if the insurer’s statutory violation caused the insured to lose that contractual right.
The “Independent Injury Rule” provides recovery for damages if an insurer’s statutory violation causes an injury independent of the loss of policy benefits, even if the policy does not grant the insured a right to benefits. This rule derives from the fact that an insurer’s extra-contractual liability is distinct from its liability for benefits under the insurance policy.
The “No-Recovery Rule “ provides no recovery of damages to an insured based on an insurer’s statutory violation, if the insured had no right to policy benefits and sustained no injury independent of a right to benefits.