The Texas Supreme Court has announced five rules which the Court believes will “provide clarity regarding the relationship between claims for an insurance policy breach and Insurance Code violations.” USAA Texas Lloyds Co. v. Menchaca, No. 14-0721, slip op. at 6 (Tex. April 7, 2017). 

The new rules are:

1. 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;
2. 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 violation causes the loss of benefits;
3. 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;
4. 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
5. 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.

In the Menchaca case, Menchaca submitted a homeowners claim to USAA following Hurricane Ike, and USAA concluded that her damages were minimal and below the amount of her deductible. Menchaca pursued claims of breach of contract and unfair and deceptive practices against USAA, which were all submitted to a jury. The jury found that USAA did not breach the contract with Menchaca, but found that USAA engaged in unfair practices, and it awarded Menchaca damages equal to those sought for breach of contract. The trial court entered judgment in Menchaca’s favor, and the court of appeals affirmed. In announcing its five rules, the Texas Supreme Court concluded that its earlier decisions on the interplay between breach of contract and violations of the Insurance Code were not sufficiently clear, and remanded the matter to the trial court for a new trial.
 
In many jurisdictions, insureds have been barred from recovering extracontractual damages where an insurer correctly paid or denied benefits, even if there were questions as to how the insurer got to that result. The Texas Supreme Court’s decision clarifies only that the analysis in such situations is not nearly that simple, nor the result so straightforward. Insurers can now expect attacks on the distinction between and overlap of policy benefits compared to damages attributable to allegedly unfair practices. Similarly, policyholders are likely to focus on insurer conduct that they may claim causes a loss of benefits, and what constitutes independent injury attributable to allegedly unfair conduct by an insurer. 
 
The Menchaca decision is likely to open new paths to potential recovery for creative plaintiff’s counsel, further complicate coverage and damages analysis, and result in significant follow up litigation seeking to clarify the five rules articulated by the court and expand that jurisprudence to other jurisdictions.