Vail Remains “Un-Veiled”

By Amy Elizabeth Stewart & Amy Kincaid Berry

On March 27, 2015, the Texas Supreme Court dismissed United National Insurance Company’s petition for review of United National Insurance Company v. AMJ Investments, LLC, 447 S.W.3d 1 (Tex. App.—Houston, June 26, 2014). This development leaves intact AMJ, which follows Vail v. Texas Farm Bureau Mutual Insurance Company, 754 S.W.2d 129 (Tex. 1988), with respect to Texas Insurance Code damages.

Policyholder counsel praise AMJ’s rejection of the so-called independent injury requirement and its revitalization of Vail.

• The independent injury requirement arises in the context of claims brought against insurers under Chapter 541 of the Texas Insurance Code and imposes a burden–not required by the Insurance Code–that an insured must show injury separate and apart from injury caused by the breach of an insurance contract in order to recover damages under the Code.
• The “requirement” or “rule” is the spawn of a line of Fifth Circuit district and appellate court opinions issued after the Texas Supreme Court’s 1998 Castaneda opinion. Castaneda held that where denial of coverage is not wrongful, claims under the Insurance Code are valid only if they have caused separate and distinct injury. Provident American Insurance Company v. Castaneda, 988 S.W.2d 189 (Tex. 1998).
• The insured in Castaneda had not sued for contractual relief. The only theories of liability were extra–contractual; a circumstance that has caused confusion in the application of Castaneda. Accordingly, a number of later cases have advanced an across-the-board independent injury rule–a rule that requires an insured to show independent injury, no matter what, in order to recover on its Insurance Code claims.
• This is at odds with Vail, which examined a wrongful denial of coverage resulting in identical injury under both Insurance Code and breach of contract theories of recovery. In that case, the high court held that the $35,000 injury constituted “actual damages” and allowed recovery of the actual damages, along with trebled damages, pursuant to the Insurance Code and the Deceptive Trade Practices Act. AMJ not only acknowledged, but followed Vail and refused to improperly extend the Castaneda ruling.

With AMJ no longer subject to review by the Texas Supreme Court, Menchaca is now a case to watch. Gail Menchaca filed suit against USAA Texas Lloyds Company (“USAA”) in connection with a claim for Hurricane Ike damage under her homeowner’s policy. “A Montgomery County jury found that USAA did not breach the policy but that it violated an insurance code provision [section 541.060] by denying Menchaca’s claim without conducting a reasonable investigation.” USAA Texas Lloyd’s Company v. Gail Menchaca, No. 13-13-00046-CV, 2014 Tex App. LEXIS 8250, at *1 (Tex. App.—Corpus Christi, July 31, 2014). USAA appealed the trial court’s judgment based on the jury award, and the appellate court affirmed the award, finding “it was not ‘established’ that the policy provided no coverage for Menchaca’s claim” and stating, “We believe that this case .... constitutes an exception to the ‘general rule’ that breach of the policy must be established before policy benefits may be recovered.” Id. at *33.  Citing Vail among other authorities, the appellate court held that the policy benefits were “indeed the correct measure of damages caused by USAA’s violation of the insurance code.” Id. at *34.

USAA has petitioned the Texas Supreme Court for review, arguing the no breach finding precludes recovery under the Insurance Code. USAA’s petition discusses the cases supporting the broad independent injury requirement but also acknowledges AMJ, which it says interprets Castaneda “to apply only if an insured fails to prove a contractual breach.” Pet. for Review, at 13. The petition goes on to state: “Even if the precise extent of Castaneda’s reach is debatable, this case falls squarely within its holding.”  Id. The high Texas court possibly could address the scope of Castaneda with respect to independent injury if it accepts review of Menchaca.

In the meantime, AMJ remains good law and, at least in cases of wrongful denial, points Texas courts back to Vail, which too often has been cast aside as courts stretch Castaneda beyond its appropriate boundaries. Vail–for good reason–never has been overturned by the Texas Supreme Court and, thanks to AMJ, its light shines brighter now.