Menchaca on Rehearing: Simpler than it Seems!
The opinion on rehearing in Menchaca came out today. What initially seems like a daunting read, with Justice Boyd authoring the 65-page plurality opinion, is actually quite clear. A majority of the Court unanimously reaffirmed the legal principles of the prior Menchaca opinion and agreed to reverse the policyholder’s judgment on her Hurricane Ike/homeowner’s claim and to remand for a new trial. Slip op. at *1. The debate between the justices on rehearing – with plurality, concurring, and dissenting opinions – addressed preservation issues. While preservation questions may be interesting to Texas appellate lawyers, the important insurance question in Menchaca was whether there could be an award of damages for violation of the Insurance Code in the absence of a breach of contract. The Court was unequivocal in finding there can be no Insurance Code violation when the policyholder is not entitled to policy benefits.
Justices Green, Guzman, and Brown would have found that the finding of no breach of contract precluded any Insurance Code recovery for the Plaintiff. Id. at 2. Chief Justice Hecht, and Justices Lehrmann, Boyd, and Devine concluded that the jury’s finding of no breach of contract along with their finding of an Insurance Code violation created a “fatal conflict” that could not be resolved on appeal and which had to be remanded for a new trial. Id. at 2-3. Justices Lehrmann, Boyd, and Devine concluded that the conflicting answers issue was waived by USAA. Id. at 3. With five votes, the Court remanded for a new trial. Id.
The primary question in Menchaca was “whether an insured can recover policy benefits as ‘actual damages’ caused by an insurer’s statutory violation absent a finding that the insured had a contractual right to the benefits under the Insurance policy.” Slip op. at *10. The easy answer to this question is “no,” based on the Court’s previous decisions addressing Stoker. A number of Stoker-related decisions have asserted that there can be no “bad faith” – common law or statutory – when a carrier promptly denies a claim that is in fact not covered. Id. at 11. We were pleased to see that the Court clarified the relationship between Vail v. Texas Farm Bureau Mut. Ins. Co., 754 S.W.2d 129 (Tex. 1988) and Provident Am. Ins. Co. v. Castañeda, 988 S.W.2d 189 (Tex. 1998) on this point, as we had urged that they do so in the amicus brief we filed on behalf of the Insurance Council of Texas.
The take-away from Menchaca is a policyholder cannot recover for a “technical” violation of the Insurance Code if the carrier did not breach its policy obligations. This is true whether the Insurance Code violation reflects a “bad faith” failure to pay or a failure to investigate or an unfair refusal to pay benefits when liability is reasonably clear. There was necessarily a fatal conflict in Menchaca: the jury could not find the carrier did not breach the policy and simultaneously award policy benefits as damages for a violation of the Insurance Code.
Though clever policyholders/plaintiffs may argue otherwise, we believe the Court’s unanimous reaffirmance of the basic principle that no breach of contract means that there can be no bad faith should provide needed clarity in the first-party insurance litigation world.