A case recently considered by Texas' Thirteenth Court of Appeals illustrates a fact pattern becoming all too familiar in Texas first-party property insurance claims. The story goes something like this.
Insured submits claim
Insurer begins investigation and estimates covered damage
Insured submits increased claim based on alleged discovery of new damage
Insurer performs reinspection and confirms original damage scope
Insured hires counsel who sends demand letter exponentially larger than the insured’s latest estimate based on alleged discovery of even more damage
Insurer hires counsel who rejects demand as ridiculous
Insured files suit (or demands appraisal)
Insurer answers suit (or responds to appraisal demand)
Insured finds yet even more damage during litigation process, often resulting from another peril, based on report of retained litigation expert
Insurer is left to determine whether to settle the claim somewhere between the ridiculous and its own damage estimate or stand by its claim measure and try the case to verdict (or risk a “split-the-baby” appraisal award).
Those familiar with the fact pattern have coined an ominous name for it — the Progressive Claims Syndrome. Others would simply call it use of the law of large numbers.
As the recent case of USAA Texas Lloyd’s Co. v. Menchaca, No. 13-13-00046-CV, (Tex.App. — Corpus Christi July 31, 2014), illustrates, Texas juries are still very capable of sniffing out claims with this fact pattern — i.e. claims afflicted with the “Progressive Claim Syndrome.”
Menchaca arose from a claim for damages to a home allegedly resulting from Hurricane Ike. After Hurricane Ike struck the Houston area in September 2008, Gail Menchaca submitted a claim under her homeowners policy for wind damage to her roof, “food damage” due to prolonged loss of electricity, and damage to a detached sprinkler system and fence.
Upon submission of the claim, USAA assigned an independent claims adjuster to investigate the alleged loss. He found some damage to the roof and a detached electrical box, but no covered damage to the interior of the home, the air conditioning units, or the fence. Ultimately, the independent adjuster determined the covered damage fell within the $2,020 policy deductible, and thus USAA did not owe for the repairs.
USAA also assigned a field adjuster to conduct a reinspection. He concluded none of the damage was attributable to Hurricane Ike and, therefore, was not covered under the policy. The field adjuster, however, did not inspect any interior damage or “food damage,” nor did he inspect the fence. He stated that Menchaca had not reported any interior damage or damage to the fence.
Menchaca’s consultant, Darrell Quinney, inspected the home in June 2009 and initially estimated repair costs to be $29,600 for full replacement of the roof. Quinney further estimated the fence repair cost at $4,700 and electrical box reattachment costs at $251. Other electrical repairs were estimated at approximately $3,300. Quinney later reinspected the house and made adjustments to his initial calculations. Accordingly, Quinney’s estimate for repairs to Menchaca’s home totaled $38,439.
Menchaca filed suit just a few months after reporting the loss, alleging breach of the policy, fraud and various violations of the insurance code. Predictably, prior to filing suit, Menchaca’s attorney sent a notice letter to USAA demanding $1,245,355.25 in economic damages, $50,000 in mental anguish damages, and $481,785.08 for “expenses,” including attorneys' fees — nearly $2 million in damages for a property insurance claim that the insured’s own consultant valued at $38,439.
In January 2011, more than two years after the loss, Menchaca’s consultant, Darrell Quinney, prepared yet another estimate. Quinney’s new estimate nearly doubled his initial one, reportedly based on another inspection as well as a report authored by an expert retained by Menchaca during the litigation. This new estimate included approximately $24,000 for repairs to alleged interior damage, and repairs to the exterior siding and trim — damages that were previously unreported. With these additions, Menchaca’s total claim for repair costs increased to $76,348.
The case was ultimately tried and submitted to a jury. The jury questionnaire contained several questions central to the court of appeals’ analysis. First, when asked whether USAA “fail[ed] to comply with the terms of the insurance policy with respect to the claim for damages made by [Menchaca] resulting from Hurricane Ike,” the jury answered “no.” The jury was then asked whether USAA engaged in any unfair or deceptive act or practice that caused damages” to Menchaca, listing numerous sections of Texas Insurance Code §541.060(a). The jury found that USAA had refused to pay the claim without conducting a reasonable investigation in violation of §542(a)(4)(A). However, the jury found USAA had not violated the remaining sections of the insurance code.
Finally, the jury was asked what sum of money would compensate Menchaca for her damages — specifying that the appropriate sum is “the difference between the amount USAA should have paid [Menchaca] for her Hurricane Ike damages and the amount that was actually paid.” Clearly rejecting Menchaca’s “progressive claim” approach, the jury cut through all the fluff and answered, “$11,350.”
After the verdict, USAA moved for entry of judgment in its favor, claiming that “when no breach of contract is found, there can be no bad-faith or extra-contractual liability as a matter of law.” Menchaca also sought entry of judgment in its favor, asking the court to disregard the first question posed to the jury. The trial court granted Menchaca’s request and entered judgment in its favor. Menchaca was ultimately awarded $164,371, which included the $11,350 in actual damages, attorneys’ fees and costs, appellate attorneys’ fees, 5 percent interest, and an 18 percent interest penalty under Chapter 542 of the Texas Insurance Code.
USAA appealed on the same basis it had sought entry of judgment in the trial court, claiming that because “no breach of contract [was] found, there can be no bad faith or extra-contractual liability as a matter of law.” Specifically, USAA relied on the Texas Supreme Court’s decision in State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010), in which the court held that “[t]here can be no liability under either Article 21.55 or Article 21.21 [now Chapters 541 and 542] of the Insurance Code ... if there is no coverage under the policy.”
In a July 31, 2014, opinion, the appellate court rejected USAA’s arguments, holding that Menchaca’s extra-contractual claims were not barred as a result of the jury’s finding that USAA had not failed to comply with the policy. Ultimately, the court based its decision on a finding that the jury’s “no” answer to the first question — whether USAA had “fail[ed] to comply with the terms of the insurance policy with respect to the claim for damages made by [Menchaca] resulting from Hurricane Ike” — did not definitively establish that there was no coverage.
Moreover, the trial court had disregarded question number 1, and thus, whether USAA had breached the contract was immaterial. Nevertheless, the court ultimately upheld the jury’s award of $11,350 in actual damages as the difference between the amount USAA should have paid to Menchaca and the amount it actually paid. The court also reversed the award of the 18 percent penalty under Chapter 542, reasoning that the jury had not determined USAA violated any provision of that chapter.
Regardless of the outcome on appeal, this case exemplifies a prevalent concern in Texas first-party property insurance claims today — the “Progressive Claim Syndrome” — as well as its most effective treatment. With the passage of time, repairs that were originally estimated by the insured to be upwards of $38,000 went to over $76,000 after suit was filed, and somehow morphed into an overall demand for almost $2 million. Though USAA ultimately lost the legal issues presented on appeal, the real lesson for USAA (and other Texas insurers) is this jury’s willingness to ignore an insured’s claim that had clearly progressed far beyond any reasonable support, with the jury ultimately finding real and provable damages not much more than USAA’s original measure.
The Progressive Claim Syndrome is a treatable condition, and the most effective treatment is prescribed by juries like this.