In Menchaca it was alleged that USAA acted in bad faith under the Texas Insurance Code by failing to conduct a reasonable investigation into a homeowner’s property damage claim that arose out of Hurricane Ike. USAA had concluded that Menchaca sustained only $700 in damage to her home, which was substantially less than the policy’s deductible. Menchaca argued that if USAA had properly investigated the claim, the insurer would have identified and been liable for thousands of dollars of additional damage to the property.
A jury found that USAA did not fail to comply with the terms of Menchaca’s policy. It also found, however, that USAA violated the Texas Insurance Code by engaging in unfair or deceptive practices in failing to perform a reasonable investigation of the claim. The jury awarded $11,350 in damages, representing the benefits USAA should have paid under the policy, and $130,000 in attorneys’ fees. On appeal, USAA argued that the jury’s finding that it did not breach the policy precluded Menchaca from recovering benefits under the policy as damages for violation of the Texas Insurance Code. The Supreme Court disagreed with USAA, stating that the issue is whether the insured was entitled to receive benefits under the policy, not whether there was an actual breach of the policy. Justice Boyd added that:
While an insured cannot recover policy benefits for a statutory violation unless the jury finds that the insured had a right to the benefits under the policy, the insured does not also have to establish that the insurer breached the policy by refusing to pay those benefits.
The Supreme Court went on to announce five rules for evaluating similar cases:
1. 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.
2. The Entitled to Benefits Rule. An insured who establishes a right to receive benefits under the policy can recover those benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of the benefits.
3. The Benefits Lost Rule. 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.
4. The Independent Injury Rule. 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.
5. The No Recovery Rule. 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.
The Supreme Court’s decision in Menchaca is significant to Texas policyholders in that it clearly identifies the circumstances under which an insured is entitled to recover benefits, and more importantly, it incentivizes insurers to timely investigate and make payment on any covered claims and generally avoid gamesmanship throughout the claim adjustment process.
Richard Brown is with Saxe Doernberger & Vita P.C.