Publications

Seeking to eliminate the “substantial confusion” among Texas courts, the Texas Supreme Court set forth five rules addressing when an insured can recover policy benefits or other damages based on statutory violations, absent a breach of contract by the insurer.  USAA Texas Lloyds Co. v. Menchaca, 2017 WL 1311752 (Tex. Apr. 7, 2017).

Menchaca sought coverage under a property policy for hurricane-related damage.  USAA denied coverage based on an adjuster’s report indicating that the amount of damage was lower than the policy’s deductible.  Menchaca sued USAA for breach of contract and violation of the Texas Insurance Code, seeking benefits under the policy.  A jury concluded that USAA did not breach the insurance policy but did engage in unfair or deceptive practices under state statutory law (i.e., refusing to pay a claim without conducting a reasonable investigation).  Based on this finding, the jury awarded Menchaca approximately $11,000 in damages.  Both parties moved for judgment based on the verdict.  USAA argued that absent a breach of contract, Menchaca could not recover extra-contractual damages, whereas Menchaca claimed that the USAA’s statutory violation justified the damages award.  The trial court ruled in Menchaca’s favor and an appellate court affirmed.  The Texas Supreme Court reversed.

Addressing the relationship between breach of contract claims under an insurance policy and claims under the Insurance Code, the court announced the following five rules:

The 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 Entitled-to-Benefits Rule:  An insured who establishes a right to receive benefits under a policy can recover those benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of benefits.

The Benefits-Lost Rule:  Even if the insured cannot establish a 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 Independent-Injury Rule:  If an insurer’s statutory violation causes an injury that is 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 No-Recovery Rule:  An insured cannot recover damages based on an insurer’s statutory violation if the insured had no right to receive benefits under the policy and did not sustain any injury independent of a right to benefits.