Are Broad Implications for Insurers Faced with Allegations of Bad Faith in Our Future?

The Texas Supreme Court is primed to hear a case that could have broad implications for insurers faced with allegations of bad faith following a coverage determination averse to an insured. At issue is whether Texas law allows a plaintiff to recover policy benefits for an insurance company’s alleged “bad faith” in rejecting a claim when the insurer did not breach the insurance contract.

Menchaca[1] begins with a damaged Houston area home in the aftermath of Hurricane Ike. Gail Menchaca submitted a homeowners claim under her policy for damage allegedly sustained to her roof, fence, and sprinkler system. Competing estimates valued the damage from around $700 (by a USAA independent adjuster) to $38,000 (by Menchaca’s consultant). After a re-inspection by USAA, conducted by yet again a new adjuster, USAA determined that any damages attributable to Hurricane Ike were below Menchaca’s $2020 policy deductible and denied coverage.

Menchaca soon after sued USAA for alleged breaches of the policy, fraud, and assorted insurance code violations, seeking then almost $2 million. The case eventually found its way to a jury that concluded that USAA did not breach the insurance policy, but did violate §542(a)(4)(A) of the Texas Insurance Code by refusing to pay the claim without conducting a reasonable investigation of the property. The trial court awarded Menchaca $11,350 in damages — based on the difference between what USAA should have paid and the amount they did pay — plus $130,000 in attorneys' fees and about $10,000 in interest.

The Thirteenth Court of Appeals left the trial court decision largely intact, vacating a portion of the interest but affirming the balance. The court harmonized the two seemingly inconsistent jury findings by concluding that the jury’s determination that USAA did not breach the policy did not compel a finding that there was no coverage.

Relying on State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010), USAA continues to contend that an insurer may not be subject to bad faith or extra-contractual liability without a foundational breach of contract. Menchaca, however, argues that USAA has “confused the concepts of coverage and breach,” and points to language in State Farm Lloyds v. Page in which the court holds that “[t]here can be no liability under either [Chapters 541 and 542] of the Insurance Code . . . if there is no coverage under the policy.”

The outcome of this case is expected to have far reaching implications for insurers operating in Texas and could potentially shape the resolution of thousands of similar suits pending in Texas.

[1] USAA Texas Lloyd's Co. v. Menchaca, 14-0721.