Entitlement To Bad Faith Damages

The standard for recovery of bad faith or extra-contractual damages is discussed in this 2019, Northern District of Texas Dallas Division opinion styled, Carolyn Kee v. Safeco Insurance Company of Indiana.

Kee sued her homeowner insurer, Safeco, for improperly adjusting her claim for damages.  Safeco’s adjuster adjusted the claim saying the amount of damages did not exceed the deductible under Kee’s policy.  Kee filed suit against Safeco and then Safeco invoked the appraisal clause in the insurance contract.

After the appraisal came back in favor of Kee, Safeco paid the appraisal amount and filed a motion for summary judgement on Kee’s claims.  The court refused the motion as it relates to the alleged Prompt Payment of Claims cause of action but on the claim for extra-contractual damages, the motion was granted.  In discussing the case the court stated as follows.

Under the Texas Insurance Code, insureds bringing claims for statutory violations may in some cases recover policy benefits as actual damages according to USAA Tex. Lloyds Co. v. Menchaca, which was decided by the Texas Supreme Court in 2019, and according to Texas Insurance Code, Section 541.152(a).  Recently, the Texas Supreme Court clarified the prerequisites to recovering policy benefits for extra-contractual claims in its Menchaca opinion.

A party claiming policy benefits as actual damages for extra-contractual claims need not show either breach of contract or independent injury to recover.  Independent injury is an alternative ground that may be used to recover policy benefits for extra-contractual claims when a claimant is otherwise not entitled to policy benefits, but it is not a threshold requirement to recovery.

It is necessary, however, that a party establish both that (1) it is entitled to policy benefits, and (2) the alleged statutory violation proximately caused the loss of some policy benefits.  “Entitled to benefits” simply means that the claimant’s insurance policy entitles her to policy benefits of some amount for a claimed loss, regardless of whether there is a breach of contract.  Proximate cause is satisfied if the alleged statutory violation caused the claimant to lose benefits she was otherwise entitled to receive.

Safeco suggests that summary judgment should be granted because Kee cannot prevail on a breach of contract claim and has not pled an independent injury, arguing that a claimant must establish one of these to succeed.  Kee counters that because neither breach of contract nor independent injury are prerequisites to success on extra-contractual claims under Texas law, summary judgment is inappropriate.  While Kee has correctly interpreted the rules in Menchaca, she has incorrectly argued that the principles in that case prevent summary judgment on her extra-contractual claims.  Kee is seeking policy benefits as the sole measure of actual damages for her extra-contractual claims, but she has suffered no loss of those policy benefits proximately caused by the alleged statutory violations.  Summary judgment evidence has established that policy benefits were paid via the appraisal award.  Kee does not contend that the appraisal award was insufficient, nor does she request any other form of actual damages. The Court, as a result finds there is no genuine dispute of material fact as to the extra-contractual claims.

Kee also argues that this outcome will result in carte blanche for insurance companies to deny or underestimate claims in bad faith then avoid consequences by paying appraisal awards after suits are filed.  The Texas Insurance Code acts to curtail these abuses by providing an action for failure to promptly pay, which the Texas Supreme Court has stated may survive even when the extra-contractual claims fail.  As a matter of fact, Kee’s TPPCA claim did survive summary judgement in this case.  But, because Kee cannot establish the prerequisites necessary to recover actual damages on her extra-contractual claims, Safeco’s motion is granted on these claims.