On April 13, 2018, the Texas Supreme Court issued its highly-anticipated decision on rehearing in USAA Tex. Lloyds Co. v. Menchaca, 2018 Tex. LEXIS 313 (Tex. Apr. 13, 2018). This replaced an earlier opinion dated April 7, 2017 (discussed below) and sought to clarify Texas insurance law and apply it to the unusual posture of this case. Specifically, the court addressed (1) whether the insured in this first-party property insurance coverage dispute could recover policy benefits under the Texas Insurance Code – essentially as extra-contractual damages for “bad faith” – even though the jury failed to find that her insurer had breached the insurance policy; and (2) how the case should proceed given the jury’s conflicting findings (i.e., that the insurer was not in breach but had violated the Insurance Code by failing to conduct a reasonable investigation and that the insured was entitled to the policy benefit as a result).
On rehearing, the court unanimously reaffirmed the five rules addressing the relationship between contract claims under an insurance policy and tort claims under the Insurance Code. The April 13, 2018 re-issued opinion reiterates that a policyholder does not have to prevail on a separate breach of contract claim to recover a policy benefit for violation of the Insurance Code but must show entitlement to that benefit. In other words, “an insured cannot recover policy benefits as damages for an insurer’s extra-contractual violation if the policy does not provide the insured a right to those benefits.”
The court substantially disagreed, however, as to whether the jury’s irreconcilable determinations required further proceedings in this case. Five justices – a majority – remanded the case for a new trial. Three dissenting justices concluded that the jury’s finding that there was no breach of the policy required judgment for the insurer. “[T]he jury’s answer is supported by evidence that the amount of [the insured’s] loss was less than the policy’s deductible . . . so the policy did not obligate [the insurer] to pay [the insured] anything. [The insured] cannot use a statutory violation theory of recovery to recover the very same contract damages that the jury specifically rejected,” the dissent said.
Notably, the opinion does not expressly address whether the court’s clarification of Texas insurance law is also intended to apply in third-party liability insurance cases (an amicus insurer raised this issue in support of the request to rehear the case). Other decisions have cited Menchaca in that context. See Aldous v. Darwin Nat’l Assur. Co., 2018 U.S. App. LEXIS 12382 (5th Cir. May 11, 2018); Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co., 877 F.3d 600 (5th Cir. 2017).
