Good news for policyholders! Insurance companies must now pay for deceptive practices under a Texas Supreme Court ruling released this week.
The opinion hinged on whether the policyholder was entitled to benefits. If so, the policyholder could recover damages for the insurance company’s wrongdoing, even if there was no breach of the insurance policy.
USAA Texas Lloyd’s v. Menchaca involved a claim for damages caused by Hurricane Ike on the Gulf Coast in 2008. Gail Menchaca filed a claim with her homeowner’s insurance for damage to her home. The adjuster for the USAA Texas Lloyds insurance company determined that the estimated repair costs were less than Ms. Menchaca’s deductible so he declined to pay her anything for the damage. A second adjuster also estimated only minimal damage from the storm.
The policyholder sued USAA for breach of her homeowner’s policy and for the company’s violation of the Texas Insurance code that governs fair settlement practices. She argued that the company’s failure to properly investigate her claim resulted in her loss of insurance benefits.
The jury found that the company did not breach the policy but did violate the insurance regulations and awarded her the damages the company should have paid on her hurricane claim. The company appealed, arguing that since it did not breach the policy, no damages for bad faith could be awarded. However the court ruled in favor of the consumer and established five new ways to determine how these cases should be decided.
The New Rules
1. General rule: The policy must provide the policyholder the right to benefits for the policyholder to recover those benefits.
2. Entitled-to-benefits rule: Once the policyholder has established a right to benefits, she can recover the amount she was entitled to as damages for the insurance company’s violation of the Texas codes.
3. Benefits-lost rule: The policyholder may recover benefits as damages if the insurance company’s code violation resulted in the loss of the policyholder’s contractual rights, even if she does not have a current contractual right to benefits.
4. Independent injury rule: The policyholder may also recover damages for harm resulting from the insurance company’s statutory violation, regardless of whether she has a right to benefits under her policy.
5. No-recovery rule: Damages are not recoverable for the insurance company’s statutory violation if the policyholder did not have a right to policy benefits and was not harmed by the code violation.
What Does this Ruling Mean for Consumers?
The Texas Insurance Code contains provisions that protect policyholders from insurance bad faith practices, such as denying a claim after an insufficient investigation as occurred in this case. Until now, insurance companies skirted these codes by simply claiming they complied with their policy’s contractual terms even if they didn’t follow the letter of the law.
The court’s decision gives more power to the code. Your insurance company must comply with the insurance code provisions independently of its compliance with your policy. As long as you had the policy rights to begin with, you can collect damages for violation of the code. This ruling applies to insurance companies across the board, including auto insurance, which is what my automobile accident firm deals with every day.
The Texas Supreme Court ruling gives the insurance company good reason to abide by the insurance statutes, which means the likelihood of a fair settlement offer sooner. If your company does violate the statute, you have additional recourse to collect treble damages.