In USAA Tex. Lloyds Co. v. Menchaca, 2017 Tex. LEXIS 361 (Tex. Apr. 7, 2017), the Texas Supreme Court was asked to decide whether an insured can recover extra-contractual damages for an insurer’s violation of the Texas Insurance Code when the insurer did not breach the insurance policy. The Court held, generally the answer is “no,” and announced five rules to determine whether the general rule, or an exception thereto, applies.
Menchaca involves an insurance dispute over the amount of damage inflicted by Hurricane Ike on covered property. Although the loss was covered by the homeowner’s policy, the insurer denied the claim because the amount to repair the loss fell within the insured’s deductible. The insured filed suit and the case was tried to a jury. The Thirteenth Court of Appeals affirmed that part of the trial court’s judgment awarding the insured extra-contractual damages of $11,500 for the insurer’s violation of the Insurance Code, which represented the amount of policy benefits the insurer “should have paid” to the insured, despite the jury’s finding that the insurer did not fail to comply with the terms of the policy. Notably, the decision reached by the Menchaca appellate court was surprising as other Texas courts have consistently held that extra-contractual damages may not be awarded to an insured for the insurer’s statutory violation when the insurer did not breach the insurance policy contract.
The Texas Supreme Court held that generally an insured cannot recover policy benefits as actual damages caused by an insurer’s violation of the Texas Insurance Code when the insurer did not breach the insurance policy; however, the courts and parties alike should use the Court’s five rules in deciding the issue, going forward. First, as a 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. Second, 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. Third, 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. Fourth, 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. 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.
The Texas Supreme Court reversed the trial court’s judgment in favor of the insured and remanded the case for a new trial consistent with the five rules announced.