The Texas Supreme Court handed down a significant case on April 7, 2017, outlining the rights, duties, and remedies available to Texas policyholders. These rights are found in what we lawyers refer to as the Texas Insurance Code (“Code”). The Code provides protections against:
1. Unfair settlement practices
2. Misrepresentations
3. Late payments of insurance proceeds when a claim is filed.
While the Republicans in the Texas House and Senate are working hard to rob policyholders of their rights, being pushed by insurance lobbyist, the Republican-controlled Texas Supreme Court is doing the opposite. When confronted with a legal issue that questioned the very rights and protections available, the Court upheld and even strengthened those Code provisions. Maybe the Legislators should just leave it to the judges.
In USAA v. Gail Menchaca, the jury found that USAA violated the Code provisions, including, “conducting a reasonable investigation” and “failing to pay a claim when liability is reasonably clear.” The jury did NOT find that USAA breached the contract. In cases like this, both issues are submitted to the jury. And, if the jury finds for the plaintiff for both, the Plaintiff is left to choose between the two. But, in Menchaca, the jury only found the Code violations, not the breach.
Because of a lot of muddy jurisprudence, including requests by the defense bar to extend the law into these areas, Texas jurisprudence was left without a clear trail. USAA argued that unless there is a breach, that none of the Code provisions apply. Menchaca argued that violation of the Code provisions can support an award of policy benefits. Starting with the basic premise that an insurance agreement is a “unique type of contract” because the insurer has “exclusive control over the evaluation, processing, and denial of claims,” and can easily take advantage of its insured, has unequal bargaining power, the starting point is understanding that an insurance contract is not like other contracts. As a result, Texas law has added protections for policyholders. It would be silly now to ignore those protections.
The Texas Supreme Court agreed with Menchaca and found the following:
1. 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. Translation: Coverage, not breach, determines whether or not the Code provisions apply.
2. 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. Translation: If the jury finds a statutory violation, that finding can support recover of policy benefits (provided there was coverage).
3. 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. Translation: Did the insurance company do something in the investigation that prevented the insured from asserting coverage?
4. 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. Translation: Stoker independent carve out stays the same – this is applicable even if no coverage.
5. 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. Translation: Just summing up 1-4.
6. And fifth, 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.
USAA Texas Lloyds Co. v. Menchaca, 14-0721, 2017 WL 1311752, at *4 (Tex. Apr. 7, 2017)
So, maybe now we can be rid of the tortured jurisprudence equating coverage with breach. I have personally witnessed counsel argue that based on the seminal case (pre-Menchaca) – Stoker – that the issue was breach, not coverage. But Stoker held that coverage was what triggered duties under the Code, not breach. Let’s hope those arguments now go away.
Maybe your representative and senator will consider this before deciding to re-write the Codes and removing protections from Policyholders.
