Need to Investigate Homeowner Claims Evaluated by Texas Supreme Court

Last week the Texas Supreme Court heard oral arguments in a case where to decide if insurance companies owe a duty to conduct a fair and reasonable investigation for policy-holder’s claims.  In USAA v. Menchaca, the case went all the way to a jury verdict.  The homeowners had a homeowner’s policy to protect their home from storm damage, like Hurricane Ike.  But the contract does not state that USAA has to conduct a fair and reasonable investigation – it just says that USAA must investigate the loss.  The duty to conduct a fair and reasonable investigation comes from the Texas Insurance Code.

The insurance code codifies legislative acts designed to protect policyholders from unfair treatment from their insurance company.  Insurance companies cannot, for example, misrepresent coverages or damages to the policyholder.  Insurance companies must also conduct a reasonable investigation and pay for covered damages when liability is reasonably clear.  It is understood in the business that “tie goes to the homeowner.”  There is another law in Texas that protects homeowners by requiring the insurance company to pay penalty interest and attorney fees if later it is determined that they owe more money than they paid on a claim.

But that is not what usually happens.  For Menchaca, the jury found that USAA did not conduct a fair or reasonable investigation.  But, the jury did not feel that USAA breached the contract as they did investigate the loss.   So, the Supreme Court is deciding if any of the legislative safeguards for homeowners apply if there was not a breach of contract.  In other words, is it enough just to start an investigation?  If the contract does not prohibit misrepresentations (they never do), is it OK for an insurance company to mislead a homeowner on the nature of the damages and coverages available to pay the claim?