SCOT Menchaca Ruling Benefits Policyholders, Clarifies Case Law
By Amy Elizabeth Stewart and Katherine Hendler Fayne
Resolving significant confusion regarding the remedies available for violations of the Texas Insurance Code, on April 7, 2017, the Texas Supreme Court issued its much-awaited decision in USAA Texas Lloyds Co. v. Menchaca. In an opinion welcomed by the policyholder bar, the Supreme Court reconciled the principles articulated in earlier decisions, clearly setting forth “five rules that address the relationship between contract claims under an insurance policy and tort claims under the Insurance Code.”
As noted in our March 2015 post, “Vail Remains ‘Un-Veiled,’” insurers have long taken the position that an insured must prove an injury separate and apart from injury caused by a breach of an insurance contract in order to recover statutory damages under the Texas Insurance Code. In the earlier post, we make the case that this position was incorrect and that the independent injury requirement applies only where an insurer’s denial of coverage was not wrongful. Menchaca brought this dispute squarely before the Texas Supreme Court.
In Menchaca, the Court considered “whether an insured can recover policy benefits as actual damages caused by an insurer’s statutory violation absent a finding that the insured had a contractual right to the benefits under the insurance policy.” In answering this question, the Court set forth five “distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context.” The first and fifth rules affirm propositions of law that were generally accepted prior to the Court’s decision. Rules two, three and four confront key areas of confusion, making clear that the remedies available under the Texas Insurance Code are not nearly as narrow in scope as insurance companies have wanted them to be.
The first general rule is that “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.” This rule is based on the Code’s requirement that an insured’s actual damages must be “caused by” the statutory violation. The Court noted that if “the insurer violates a statutory provision, that violation—at least generally—cannot cause damages in the form of policy benefits that the insured has no right to receive under the policy.”
No Conflict with Vail
The second rule provides that “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 benefits.” (Emphasis added). This rule reaffirms the Court’s holding in Vail v. Texas Farm Bureau Mutual Ins. Co., 754 S.W.2d 129 (Tex. 1988), and in Menchaca, the Court underscored the principle that the Code’s “statutory remedies are cumulative of other remedies,” and therefore, insureds can “elect to recover the benefits under the statute even though they also could have asserted a breach-of-contract claim.” The Court clarified that no conflict exists between its holdings in Vail and Provident American Ins. Co. v. Castaneda, 988 S.W.2d 189 (Tex. 1998) because in Vail, there was no dispute that the policyholder was entitled to policy benefits, but in Castaneda, the policyholder had not even alleged that she was entitled to policy benefits.
The Menchaca holding is particularly helpful for policyholders because it clearly characterizes policy benefits as “actual damages,” opening the door for insureds to seek trebling of those “actual damages” pursuant to section 541.152(b) of the Code where an insurer has “knowingly committed” the statutory violation. This conforms with the Insurance Code’s provision, recognized in Vail, that the “statutory remedies are cumulative of other remedies.”
The third rule is “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.” The Court noted that this rule has been recognized in several contexts, including claims alleging “that an insurer misrepresented a policy’s coverage, waived its right to deny coverage or is estopped from doing so, or committed a violation that caused the insured to lose a contractual right to benefits that it otherwise would have had.” In some limited cases, therefore, a policyholder may be able to assert statutory claims to recover policy benefits as damages if the insurer “commits a statutory violation that eliminates or reduces its contractual obligations.”
Under the fourth 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.” The Court noted that it had originally articulated this rule in Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), but that no Texas court had ever found that a policyholder was entitled to recover for such an independent injury. The Court stated again that while such a claim “could exist, we have no occasion to speculate what would constitute a recoverable independent injury.”
Good News to Policyholders
Finally, the fifth rule states that “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.” This rule, like the first, has not been the subject of serious confusion and is, in the words of the Court, the “natural corollary” to the other four rules.
While insurers are saying the Menchaca decision muddied the waters and more litigation will ensue in an attempt to limit the scope of the holding, the opinion’s clarifications are good news to policyholders.