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Usaa Texas Lloyds Co. v. Menchaca

Supreme Court of Texas

April 7, 2017

USAA Texas Lloyds Company, Petitioner,
v.
Gail Menchaca, Respondent

          Argued October 11, 2016

         On Petition for Review from the Court of Appeals for the Thirteenth District of Texas

          Roeding Justice Johnson did not participate in the decision.

          Jeffrey S. Boyd Justice.

         When this Court decides a case by announcing a rule of law, the decision serves as "binding precedent . . . when the very point is again presented in a subsequent suit between different parties." Swilley v. McCain, 374 S.W.2d 871, 875 (Tex. 1964). Yet as one of history's most renowned jurists once observed, "seldom will it happen that any one rule will exactly suit with many cases." 3 William Blackstone, Commentaries *335 (1765). We have similarly acknowledged that "it is at best difficult to avoid some uncertainties in the law because of the varying facts attending the different cases." Trapp v. Shell Oil Co., 198 S.W.2d 424, 427 (Tex. 1946). When our decisions create such uncertainties, "it is our duty to settle the conflicts in order that the confusion will as nearly as possible be set at rest." Id.

         Today we endeavor to fulfill that duty in this case involving an insured's claims against her insurance company. The primary issue is whether the insured can recover policy benefits based on jury findings that the insurer violated 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 though the jury also failed to find that the insurer failed to comply with its obligations under the policy. Unfortunately, our precedent in this area has led to substantial confusion among other courts, and that confusion has permeated this case. In resolving this appeal, we seek to clarify our precedent by announcing five rules that address the relationship between contract claims under an insurance policy and tort claims under the Insurance Code. Ultimately, because the trial court and the parties lacked the clarity we provide today, and because their shared confusion prevented a proper resolution of these claims, we reverse the court of appeals' judgment and remand the case to the trial court for a new trial in the interest of justice.

         I.

         Background

         After Hurricane Ike struck Galveston Island in September 2008, Gail Menchaca contacted her homeowner's insurance company, USAA Texas Lloyds, and reported that the storm had damaged her home. USAA sent an adjuster to investigate Menchaca's claim, and the adjuster found only minimal damage. Based on the adjuster's findings, USAA determined that its policy covered some of the damage but declined to pay Menchaca any benefits because the total estimated repair costs did not exceed the policy's deductible.[1] About five months later, at Menchaca's request, USAA sent another adjuster to re-inspect the property. This adjuster generally confirmed the first adjuster's findings, and USAA again refused to pay any policy benefits. Menchaca sued USAA for breach of the insurance policy and for unfair settlement practices in violation of the Texas Insurance Code.[2] As damages for both claims, she sought only insurance benefits under the policy, plus court costs and attorney's fees.[3]

         The parties tried the case to a jury. Question 1 of the jury charge, which addressed Menchaca's breach-of-contract claim, asked whether USAA failed "to comply with the terms of the insurance policy with respect to the claim for damages filed by Gail Menchaca resulting from Hurricane Ike." The jury answered "No." Question 2, which addressed Menchaca's statutory claims, asked whether USAA engaged in various unfair or deceptive practices, including whether USAA refused "to pay a claim without conducting a reasonable investigation with respect to" that claim. As to that specific practice, the jury answered "Yes."[4] Question 3 asked the jury to determine Menchaca's damages that resulted from either USAA's failure to comply with the policy or its statutory violations, calculated as "the difference, if any, between the amount USAA should have paid Gail Menchaca for her Hurricane Ike damages and the amount that was actually paid."[5]The jury answered "$11, 350."[6]

         Both parties moved for judgment in their favor based on the jury's verdict. USAA argued that because the jury failed to find in its answer to Question 1 that USAA failed to comply with the policy's terms, Menchaca could not recover for "bad faith or extra-contractual liability as a matter of law." Menchaca argued that the court should enter judgment in her favor based on the jury's answers to Questions 2 and 3, neither of which was conditioned on a "Yes" answer to Question 1. The trial court disregarded Question 1 and entered final judgment in Menchaca's favor based on the jury's answers to Questions 2 and 3. The court of appeals affirmed, ___ S.W.3d ___, [7]and we granted USAA's petition for review.

         II.

         Recovering Policy Benefits for Statutory Violations

         The parties agree that the damages the jury found in response to Question 3 represent the amount of insurance policy benefits the jury concluded USAA "should have paid" to Menchaca. USAA contends that Menchaca cannot recover any amount of policy benefits because the jury failed to find that USAA breached its obligations under the policy. Although the jury did find that USAA violated the Insurance Code, USAA contends that Menchaca cannot recover policy benefits based on that finding alone.[8] USAA primarily relies on Provident American Insurance Co. v. Castañeda, in which we stated that an insurance company's "failure to properly investigate a claim is not a basis for obtaining policy benefits." 988 S.W.2d 189, 198 (Tex. 1998). Menchaca argues that the jury's findings that USAA violated the Code and that USAA "should have paid" Menchaca $11, 350 sufficiently support the award of policy benefits. Menchaca primarily relies on Vail v. Texas Farm Bureau Mutual Insurance Co., in which we stated 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." 754 S.W.2d 129, 136 (Tex. 1988).

         Courts and commentators have expressed confusion over our decisions in this area, and over our statements in Castañeda and Vail in particular.[9] The United States Court of Appeals for the Fifth Circuit, for example, recently concluded that Castañeda and other "decisions from the Supreme Court of Texas and Texas's intermediate appellate courts arguably cast doubt on Vail's continued vitality." In re Deepwater Horizon, 807 F.3d 689, 698 (5th Cir. 2015). In the Deepwater Horizon panel's view, the Fifth Circuit interpreted Castañeda "as setting out the opposite rule from that in Vail." Id. (citing Great Am. Ins. Co. v. AFS/IBEX Fin. Servs., 612 F.3d 800, 808 & n.1 (5th Cir. 2010)).[10] Today's case presents an opportunity to provide clarity regarding the relationship between claims for an insurance policy breach and Insurance Code violations. In light of the confusing nature of our precedent in this area, we begin by returning to the underlying governing principles. See, e.g., U.S. v. New Mexico, 455 U.S. 720, 733 (1982) (concluding that "the confusing nature of our precedents counsels a return to the underlying constitutional principle").

         The first of these principles is that an "insurance policy is a contract" that sets forth the respective rights and obligations to which an insurer and its insured have mutually agreed. RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015); see also Tex. Ass'n of Ctys. Cty. Gov't Risk Mgmt. Pool v. Matagorda Cty., 52 S.W.3d 128, 131 (Tex. 2000) (noting that an "insurance policy . . . defines the parties' rights and obligations"). Generally, we construe a policy using the same rules that govern the construction of any other contract. See Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 778 (Tex. 2008) (citing Forbau v. Aetna Life Ins., Co., 876 S.W.2d 132, 133 (Tex. 1994)). An insurance policy, however, is a unique type of contract because an insurer generally "has exclusive control over the evaluation, processing[, ] and denial of claims, " and it can easily use that control to take advantage of its insured. Arnold v. Nat'l Cty. Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). Because of this inherent "unequal bargaining power, " we concluded in Arnold that the "special relationship" between an insurer and insured justifies the imposition of a common-law duty on insurers to "deal fairly and in good faith with their insureds." Id.

         Similar to that common-law duty, the 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. See, e.g., Tex. Ins. Code § 541.060(a) (prohibiting insurers from engaging in a variety of "unfair settlement practices"). 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, court costs, and attorney's fees, plus treble damages if the insurer "knowingly" commits the prohibited act. Id. §§ 541.151, .152; Tex. Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430, 441 (Tex. 2012).[11] "Actual damages" under the Insurance Code "are those damages recoverable at common law, " State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 435 (Tex. 1995) (citing Brown v. Am. Transfer & Storage Co., 601 S.W.2d 931, 939 (Tex. 1980)), which include "benefit-of-the-bargain" damages representing "the difference between the value as represented and the value received, " Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 817 (Tex. 1997) (citing Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369, 373 (Tex. 1984)). But the Code does not create insurance coverage or a right to payment of benefits that does not otherwise exist under the policy. See Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 600 (Tex. 1993) (discussing the necessity of distinguishing bad-faith issues from "the contract issue of coverage").

         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. See Liberty Nat'l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996) ("Insurance coverage claims and bad faith claims are by their nature independent."); Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663, 666 (Tex. 1995) (noting that a bad-faith claim is "distinct" from a suit for breach of the policy); Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995) ("[A] policy claim is independent of a bad faith claim."). 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." Twin City, 904 S.W.2d at 666; see also Viles v. Sec. Nat'l Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990) ("[A] breach of the duty of good faith and fair dealing will give rise to a cause of action in tort that is separate from any cause of action for breach of the underlying insurance contract."). But the claims are often "largely interwoven, " and the same evidence is often "admissible on both claims." Akin, 927 S.W.2d at 630.

         The primary question in this case is 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. Generally, the answer to this question is "no, " but the issue is complicated and involves several related questions. In an effort to clarify these issues, we distill from our decisions five distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context. 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.

         A. The General Rule

         The general rule is that an insured cannot recover policy benefits for an insurer's statutory violation if the insured does not have a right to those benefits under the policy. This rule derives from the fact that the Insurance Code only allows an insured to recover actual damages "caused by" the insurer's statutory violation. See Tex. Ins. Code § 541.151; Minn. Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 780 (Tex. 2006). We first announced this rule in Stoker, 903 S.W.2d at 341. The insurer in Stoker relied on an invalid reason to deny the insureds' claim for benefits but later asserted a valid basis for denying the claim. See id. at 339. The insureds sued the insurer for breach of contract and for bad-faith denial of the claim, seeking only policy benefits as damages. Id. at 339-40. The trial court granted summary judgment for the insurer on the breach-of-contract claim because the policy did not cover the claim. Id.at 339. The jury, however, found the insurer liable on the extra-contractual claims, and based on that finding, the trial court awarded policy benefits as "extra-contractual damages." Id. at 339-40. The court of appeals affirmed, but we reversed and rendered judgment for the insurer. We explained that as "a general rule there can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered." Id. at 341.[12]

         Some courts have read Stoker to hold that no claim for any kind of bad-faith conduct can exist if the policy does not cover the claim. But Stoker involved only a claim for bad-faith denial of the insureds' claim for benefits. We clarified this point the following year in Akin: "While Stoker held that a judgment for the insurer on the coverage claim prohibits recovery premised only on bad faith denial of a claim, it does not necessarily bar all claims for bad faith." 927 S.W.2d at 631 (citing Stoker, 903 S.W.2d at 342) (emphases added). Thus, a more accurate statement of the rule we announced in Stoker is that "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." Stoker, 903 S.W.2d at 341.

         Although Stoker involved only a bad-faith-denial claim, we have since applied its general rule to other types of extra-contractual violations. In doing so, we have confirmed that the rule is based on the principle that an insured who sues an insurer for statutory violations can only recover damages "caused by" those violations. In Progressive County Mutual Insurance Co. v. Boyd, for example, the insured alleged that the insurer breached the policy and violated the Code and its common-law duty by failing to promptly pay his claim, failing to fairly investigate the claim, and denying the claim in bad faith. 177 S.W.3d 919, 920, 922 (Tex. 2005) (per curiam). Because these extra-contractual claims were "predicated on [the] insurance policy and the accident being covered under the insurance policy, " we held that the trial court's take-nothing judgment on the contract claim "negate[d]" the extra-contractual claims. Id. at 920-21. Specifically addressing the statutory prompt-payment claim, we explained that there "can be no liability [under the Code] if the insurance claim is not covered by the policy." Id. at 922. Similarly, in Chrysler Insurance Co. v. Greenspoint Dodge of Houston, Inc., we quoted Stoker's general rule and held that, because the insurer "did not breach the insurance contract, no basis supports" the insured's recovery of "punitive and extra-contractual damages." 297 S.W.3d 248, 253-54 (Tex. 2009) (per curiam). And in State Farm Lloyds v. Page, we said, "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." 315 S.W.3d 525, 532 (Tex. 2010) (citing Boyd, 177 S.W.3d at 921). Most recently, in JAW the Pointe, L.L.C. v. Lexington Insurance Co., we relied on Stoker for the proposition that when an insurance policy does not cover the insured's claim for benefits, "the insured cannot recover for the insurer's bad faith failure to effectuate a prompt and fair settlement of the claim." 460 S.W.3d 597, 599, 602 (Tex. 2015).

         In the present case, the jury found that USAA violated the Code by denying the claim without conducting a reasonable investigation. See Tex. Ins. Code § 541.060(a)(7) (providing that an insurer that "refus[es] to pay a claim without conducting a reasonable investigation with respect to the claim" commits an unfair settlement practice). In our early decisions, we mentioned this type of statutory violation but did not specifically address whether the general rule applies to such a claim. In Stoker, we expressly stated that the general rule should not "be understood as retreating from the established principles regarding the duty of an insurer to timely investigate its insureds' claims." 903 S.W.2d at 341. But we did not cite any authority for those "established principles." Instead, we merely noted, "These circumstances are not present in this case." Id.[13] That same year, we noted in Twin City that "some acts of bad faith, such as a failure to properly investigate a claim or an unjustifiable 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." 904 S.W.2d at 666 n.3 (emphases added). The following year, we noted in Akin that the insured alleged that the insurer violated its statutory duties by failing to "properly investigate" the claim, 927 S.W.2d at 629, and we explained that the general rule "does not necessarily bar all claims for bad faith, " id. at 631 (citing Stoker, 903 S.W.2d at 342), but we did not specifically address whether the general rule applies to an improper-investigation claim.

         We did address something akin to an improper-investigation claim, however, in Castañeda. The insured in that case sued her insurer alleging statutory violations "arising out of the denial of her claim for benefits under a health insurance policy and the manner in which her claim was handled." 988 S.W.2d at 191. But she did not assert a claim for breach of contract or seek a finding that the policy covered her claim. Id. at 196, 201. Instead, she argued that she was entitled to recover damages "equivalent to policy benefits" based on the jury's finding that the insurer violated the statute by failing to acknowledge communications about the claim and by failing "to adopt reasonable standards for investigating claims." Id. at 198 (emphasis added). We found no evidence that the insurer violated the statute in either manner. Id. at 192. We also explained that, even if there had been evidence of a violation, a "failure to properly investigate a claim is not a basis for obtaining policy benefits." Id. at 198 (citing Stoker, 903 S.W.2d at 341). We ultimately rendered judgment for the insurer because "no support in the evidence for any of the extra-contractual claims" existed and because the insured "did not plead and did not obtain a determination [that the insurer] was liable for breach of the insurance contract." Id. at 201. We held similarly in Boyd, 177 S.W.3d at 922. Because the claim there was predicated on the accident being covered under the insurance policy, when the trial court granted a take-nothing judgment on the insured's breach-of-contract claim, the insured's failure-to-fairly-investigate claim failed as well. Id. at 920-21; see also In re Allstate Cnty. Mut. Ins. Co., 447 S.W.3d 497, 501 (Tex. App.- Houston [1st Dist.] 2014, orig. proceeding) (citing Boyd for the proposition that an "insurer generally cannot be liable for failing to settle or investigate a claim that it has no contractual duty to pay").

         Here, Menchaca contends that she can recover policy benefits as damages resulting from USAA's statutory violation because that claim is independent from her claim for policy breach. The court of appeals agreed, reasoning that the statute "imposes a duty on an insurer, above and beyond the duties established by the insurance policy itself, to conduct a reasonable investigation prior to denying a claim, " and thus "USAA could have fully complied with the contract even if it failed to reasonably investigate Menchaca's claim." ___ S.W.3d ___. While we agree with the court's premise that USAA could have complied with the policy even if it failed to reasonably investigate the claim, we reject its conclusion just as we expressly rejected it in Stoker. Although we accepted the argument's premise that "a policy claim is independent of a bad faith claim, " we found that the "asserted conclusion . . . does not necessarily follow, " at least when the claim seeks benefits "not covered by the policy." Id. at 340-41.

         The reason we reject Menchaca's independent-claims argument-indeed, the very reason for the general rule-derives from the fact that the Insurance Code only allows an insured to recover actual damages "caused by" the insurer's statutory violation. Tex Ins Code § 541151 "Actual damages" are the common-law damages the insured sustains "as a result of" the statutory violation Kish v Van Note, 692 S.W.2d 463, 466 (Tex 1985) (citing Smith v Baldwin, 611 S.W.2d 611, 617 (Tex 1980)) If the insurer violates a statutory provision, that violation-at least generally [14]-cannot cause damages in the form of policy benefits that the insured has no right to receive under the policy We acknowledged this reasoning in Castañeda, noting that the "concurring Justices in Stoker agreed that the manner in which a claim is investigated must be the proximate cause of damages before there could be a recovery" 988 S.W.2d at 198 (citing Stoker, 903 S.W.2d at 345 (Spector, J, concurring)).[15] We held that, in the absence of a finding that the insurer had breached the policy, the insured could not recover any damages because none of the insurer's alleged statutory violations "was the producing cause of any damage separate and apart from those that would have resulted from a wrongful denial of the claim." Id. Because the insured only sought damages that "flow[ed]" and "stemmed from the denial of benefits, " id. at 198, 199, she could not recover anything because she "did not plead and did not obtain a determination [that the insurer] was liable for breach of the insurance contract." Id. at 201.[16]

         Relying on these decisions, USAA contends that the general rule applies here and Menchaca cannot recover policy benefits based on a statutory violation because the jury failed to find that USAA "breached" the insurance contract. In response, Menchaca argues that she can avoid the general rule by obtaining a finding that the policy "covers" her losses, and she did not have to obtain a finding that USAA "breached" the policy to recover under the statute. Our precedent is confusing on this point because we have actually used both phrases to describe the general rule. See, e.g., JAW the Pointe, 460 S.W.3d at 599 (holding that insured could not recover benefits as statutory damages because "the policy did not cover the insured's losses") (emphasis added); Page, 315 S.W.3d at 532 ("There can be no liability under [the Insurance Code] if there is no coverage under the policy.") (emphasis added); Chrysler, 297 S.W.3d at 254 (holding that insured could not recover extra-contractual damages because the insurer "did not breach the insurance contract") (emphasis added); Boyd, 177 S.W.3d at 920-21 (concluding that a take-nothing judgment on a breach-of-contract claim negated recovery of benefits as statutory damages); Castañeda, 988 S.W.2d at 201 (holding that insured could not recover statutory damages "equivalent to policy benefits" because she did not plead or establish that the insurer "was liable for breach of the insurance contract") (emphasis added); Stoker, 903 S.W.2d at 341 ("[T]here can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered.") (emphasis added).

         In one sense, no relevant distinction exists between "breach" and "coverage" in this context because 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. If the policy does not cover the insured's loss, the insurer does not breach the policy by failing to pay benefits for that loss, because the insured is not entitled to those benefits. Conversely, if the policy does cover the loss, the insurer necessarily breaches the policy if it fails to pay benefits for the loss because the insured is entitled to those benefits. In another sense, however, an important distinction does exist because USAA contends that Menchaca could not recover policy ...


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