AUSTIN – The Supreme Court of Texas has overturned two lower court rulings and ordered that a new trial take place in an $11,350 Galveston Island insurance case.

On April 7, the court ruled in the case of USAA Texas Lloyds Co v. Gail Menchaca that both the lower and appellate courts ruled in error, and that the case will have to be re-tried. In addition, the court clarified an existing precedent surrounding the issue of whether an insured individual can recover policy benefits based on jury findings that the insurer violated the Texas Insurance Code and should be paid under the policy, despite the jury's finding that that the insurer failed to comply with its obligations under the policy.

The case has its origins in the damage caused by Hurricane Ike's arrival on Galveston Island and the damage it caused to Menchaca's home September 2008. When she contacted the defendant, her insurance provider at the time, Menchaca was allegedly informed that the damage to her home fell under the deductible for her plan. She responded by suing USAA for breach of her insurance policy and for unfair settlement practices in violation of the Texas Insurance Code.

During the subsequent trial, the jury was tasked to answer three questions. The first question asked whether the defendant failed to follow the terms of the insurance policy with respect to the damage to Menchaca's home resulting from Hurricane Ike. The second question focused on whether the defendant engaged in various unfair or deceptive practices. The final question addressed the issue of whether or not the damages to Menchaca's home cost more than the deductible. The jury response was to answer "no" to question one, "yes" to question two and to question three that the difference was $11,350.

Both the initial trial court and the court of appeals agreed to enter a summary judgment in favor of the plaintiff based on the jury's answers to questions two and three. However, in its appeal, USAA contended that Menchaca cannot recover any amount of policy benefits because the jury failed to find that USAA breached its obligations under the policy, even though the jury did agree that USAA violated the Insurance Code. USAA's argument hinges on a precedent set in Provident American Insurance Co. v. Castañeda, a case in which the Supreme Court stated that an insurance company's “failure to properly investigate a claim is not a basis for obtaining policy benefits.”

This led the court to clarify its previous rulings by explaining that an insured individual cannot recover policy benefits as actual damages caused by an insurer's statutory violation. The reason the court finally chose to deny Menchaca's claim is came down to its decision that the Texas Insurance Code only allows an insured individual to recover actual damages that are the result of the insurer's statutory violation, which was not the case in USAA Texas Lloyds Co v. Gail Menchaca. The court then affirmed the general rule that an insured individual cannot recover policy benefits as actual damages for an insurer's statutory violation if the insured has no right to those benefits under the policy. 

After clarifying the ruling the court ordered a new trial that could be held in accordance with the newly established rules.

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