With hurricane season in full swing, policyholders should keep an eye on the Texas Supreme Court for a decision that may impact future recovery efforts. On Tuesday, October 11, 2016, the Texas Supreme Court heard oral argument in USAA Texas Lloyds Co. v. Gail Menchaca, Case No. 14-0721, regarding whether a jury’s award of damages for the insurer’s failure to conduct a reasonable investigation (in violation of the Texas Insurance Code) could stand despite the jury’s finding that the insurer did not breach the insurance policy.
The case arose from a dispute over the cost of wind damage to Gail Menchaca’s home in 2008 after Hurricane Ike. Menchaca filed a claim under her homeowners’ insurance policy with USAA. The insurer found the loss covered, but determined that the damages were approximately $700 – less than her $2,020 deductible and between $38,000 and $76,000 less than her repair estimates. Menchaca sued for breach of the policy, fraud, and violations of the Texas Insurance Code’s prohibition against “unfair or deceptive act or practices” with respect to covered claims, including practices such as “refus[al] to pay a claim without conducting a reasonable investigation . . . .” Tex. Ins. Code Ann. § 541.060(a)(7).
After hearing the evidence, the jury found that USAA had not “fail[ed] to comply with the terms of the insurance policy.” However, the jury also found that USAA had failed to conduct a reasonable investigation, as required by statute, and awarded Menchaca $11,350 in damages – i.e., “the difference . . . between the amount USAA should have paid [Menchaca] for her Hurricane Ike damages and the amount that was actually paid” – and $130,000 in attorney’s fees.
USAA appealed, arguing that, where there is no breach of the insurance policy, there can be no bad faith or extra-contractual liability in tort or under the statute. The Court of Appeals disagreed, reasoning that the Texas Insurance Code imposed additional duties beyond the terms of the insurance policy (namely, the duties to reasonably investigate and to pay damages that could have been discovered through reasonable investigation). This meant that the jury could have reasonably found that USAA had complied with the policy but had not complied with its statutory obligation to reasonably investigate the claim. Accordingly, the Court of Appeals affirmed the jury’s verdict.
We will monitor how the Texas Supreme Court handles the Menchaca decision on appeal. For now, the case serves as an important reminder about the variety of ways a policyholder may recover against its insurer – even when there is no apparent breach of the insurance policy. Statutes can play an important role in recovery, since many states (including Massachusetts, New York, North Carolina, and Texas) allow direct actions against insurers for deceptive trade practices. See generally United Policyholders, 50 State Survey of Bad Faith Laws and Remedies (Oct. 23, 2014), Policyholders should keep these remedies in mind, especially as they clean up after Hurricane Matthew.