This claim arises from an insured’s claim for losses sustained during Hurricane Ike. The insured sued USAA for (1) breach of contract and for (2) Unfair Settlement Practices under the Texas Insurance Code. As damages for both claims, the insured sought only policy benefits plus court costs and attorney’s fees. In evaluating the bad faith claims brought by the insured against USAA, the Supreme Court acknowledges that some of its previous decisions have created uncertainty in the law. As a result, this opinion is designed to put that uncertainty to rest as nearly as possible.
The primary issue is whether the insured can recover policy benefits based on jury findings that the insurer violation the Texas Insurance Code and that the violation resulted in the insured’s loss of benefits the insurer “should have paid” under the policy, even the jury also failed to find that the insurer failed to comply with its obligation under the policy. USAA argued that because the jury found there was no breach of contract, Menchaca could not recover for “bad faith” or extra-contractual liability as a matter of law. The Court disagreed with USAA and re-affirmed its holding in Vail v. Texas Farm Bureau Mut. Ins. Co., where the Court held that an insurer’s “unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.”
As part of its review of Texas law, the Court started with a review of some basic insurance principles such as: “An insurance policy is a contract.” The policy sets forth the respective rights and obligations to which an insurer and its insured have mutually agreed. The Texas Insurance Code supplements the parties’ contractual rights and obligations by imposing procedural requirements that govern the manner in which insurers review and resolve an insured’s claim for policy benefits. The Code grants insureds a private action against insurers that engage in certain discriminatory, unfair, deceptive, or bad-faith practices, and it permits insureds to recover “actual damages . . . caused by” those practices, plus court costs, attorney’s fees, and treble damages if the insurer “knowingly” commits the prohibited act. “Actual damages” under the Insurance Code “are those damages recoverable at common law.” An insured’s claim for breach of an insurance contract is “distinct” and “independent” from claims that the insurer violated its extra-contractual common-law and statutory duties. A claim for breach of the policy is a “contract cause of action” while a common-law or statutory bad-faith claim “is a cause of action that sounds in tort.”
In deciding this opinion, the Court announced 5 Rules that address the relationship between contract claims under an insurance policy and tort claims under the Insurance Code:
1. General Rule: Generally, 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.
As a general rule, there can be no claim for bad faith denial of an insured’s claim for policy benefits when an insurer has promptly denied a claim that is in fact not covered. When the issue of coverage is resolved in the insurer’s favor, extra-contractual claims do not survive, and there is no liability under the Insurance Code if there is no coverage under the policy.
However, in this case, the jury found USAA violated the Code by denying a covered claim without conducting a reasonable investigation. Further, Menchaca argued that the since there was coverage for the claim, the failure to reasonably investigate the claim is an independent claim from any claim for breach of contract.
The Court noted that some acts of bad faith, such as a failure to properly investigate a claim or an unjustified delay in processing a claim, do not necessarily relate to the insurer’s breach of its contractual duties to pay covered claims, and may give rise to different damages. Failure to investigate a claim, in the absence of coverage, does not give rise to a basis for obtaining policy benefits.
While the Court agreed that USAA could have complied with the policy but failed to reasonably investigate the claim, the Supreme Court rejected the appellate court’s and Menchaca’s independent-claims argument in this case because the damages sought by Menchaca for the failure to conduct a reasonable investigation were not covered under the policy because the damages Menchaca was seeking did not exceed the amount of her deductible.
The Court makes clear that the Code only allows an insured to recover actual damages “caused by” the insurer’s statutory violation. If the insurer violates the Code, generally, that violation cannot cause damages in the form of policy benefits which the insured has no right to receive under the policy. There can be no liability under the Insurance Code if there is no coverage under the policy. “There can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered.” No breach can occur unless coverage exists, and if there is coverage, there is necessarily a breach if the insurer fails to pay the amount covered.
The Court disagreed with USAA’s contention that an insured can never recover policy benefits as damages for a statutory violation. What matters for purposes of causation under the statute is whether the insured was entitled to receive benefits under the policy. While an insured cannot recover policy benefits for a statutory violation unless the jury finds that the insured had a right to the benefits under the policy, the insured does not also have to establish that the insurer breach the policy by refusing to pay those benefits. If the jury finds that the policy entitles the insured to receive the benefits and that the insurer’s statutory violation caused the insured to not receive those benefits, the insured can recover the benefits as “actual damages . . . caused by” the statutory violation.
“Because an insurer’s statutory violation permits an insured to receive only those “actual damages” that are “caused by” the violation, we clarify and affirm the general rule that an insured cannot recover policy benefits as actual damages for an insurer’s statutory violation if the insured has not right to those benefits under the policy.”
2. The Entitled-to-Benefits Rule: As recognized in Vail, an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as “actual damages” under the statute if the insurer’s statutory violation causes the loss of the benefits. Here, the Court rejected USAA’s contention that the insured could not recover policy benefits as damages for statutory violations because “the amount due under the policy solely represents damages for breach of contract and does not constitute actual damages in relation to a claim of unfair claims settlement practices.” Further, the Court held that “an insurer’s unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.” When an insured suffers a loss that is covered under the policy, that loss was “transformed into a legal damage” when the insurer “wrongfully denied the claim.” That “damage is, at a minimum, the amount of policy proceeds wrongfully withheld by the insurer.” If an insurer’s “wrongful” denial of a “valid” claim for benefits results from or constitutes a statutory violation, the resulting damages will necessarily include “at least the amount of the policy benefits wrongfully withheld.”
3. The Benefits-Lost Rule: “An insured can recover benefits as actual damages under the Insurance Code even if the insured has no right to those benefits under the policy, if the insurer’s conduct caused the insured to lose that contractual right.”
In the context of an insurer’s misrepresentation of a policy’s coverage by wrongfully advising the insured that the policy contains coverage which in fact it does not contain, an insured may recover such benefits if the insured is “adversely affected” or injured by reliance on the misrepresentation. This principal has been recognized in the context that the insurer waives its right to deny coverage, is estopped from doing so, or commits a violation that causes the insured to lose a contractual right to benefits that the insured otherwise would have had. As the Court notes, a misrepresentation claim is independent, and may exist in the absence of coverage.
4. The Independent-Injury Rule: An insurer’s extra-contractual liability is “distinct” from its liability for benefits under the insurance policy. There are 2 aspects to this Rule.
a) If an insurer’s statutory violation causes an injury independent of the insured’s right to recover policy benefits, the insured may recover damages for that injury even if the policy does not entitle the insured to receive benefits. Thus, an insured can recover actual damages caused by the insurer’s bad-faith conduct if the damages are “separate from and . . . differ from benefits under the contract.” This aspect of the independent-injury rule applies only if the damages are truly independent of the insured’s right to receive policy benefits. It does not apply if the insured’s statutory or extra-contractual claims “are predicated on [the loss] being covered by the insurance policy.”
b) An insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits. Thus, an insured who prevails on a statutory claim cannot recover punitive damages for bad-faith conduct in the absence of independent actual damages arising from that conduct. Thus, while the Court re-affirms its holding in Republic Ins. Co. v. Stoker, where the Court remains open to “the possibility that in deny the claim, the insurer may commit some act, so extreme, that would cause injury independent of the policy claim”, the Court acknowledges that such independent injury would be “rare” and no Texas Court has found an instance where the insured was entitled to recover for an independent injury as a result of an insurer’s extreme act. As a result, the Court declined to speculate what would constitute a recoverable independent injury.
5. The No-Recovery Rule: An insured cannot recover any damages based on an insurer’s statutory violation unless the insured establishes:
a) a right to receive benefits under the policy; or
b) an injury independent of a right to benefits.