INSURANCE TREATISE–1802: GOOD FAITH AND FAIR DEALING

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A TREATISE ON THE LAW OF INSURANCE: IN FOUR BOOKS  (1802)

Good Faith & Contracts of Insurance

Obviously, the above-titled treatise is a very old one, though by no means the oldest. The date February 2, 1802 is the date the author signed the Preface. There are several different dates to be found in various sources as to the publication dates of the book itself; 1802 is one of them. It looks like the first American edition was published in 1805. 

This means that in 2020, the American edition I’m working from is 215 years old. I don’t know if it should be used in law school courses, but it contains much familiar law. 

The author Samuel Marshal, Serjeant at Law, apparently died in 1823, which is also another publication date of the book. 

The book falls into four sections:

Of Marine Insurance
Of Bottomry and Respondentia
Of Insurance Upon Lives
Of Insurance Against Fire.

By far the majority of the 759 pages to which I have access are devoted to the first two of these topics, both of which pertain to matters marine. I shall discuss some of the particular substantive matters the book says elsewhere.

Here I am interested only in the topic of good faith and therefore bad faith. As a start, I am only interested in a short passage on the importance of good faith in contracts of insurance. RThis passage is to be found in the Marine Insurance section.  It is the introductory paragraph in Chapter IX which is entitled “Of Representations.”  It is to be found at p. 334. (I have updated and Americanized the spelling in the passage I quote here.):

“Good faith should preside in all the transactions of commerce, and in none more than those of insurance, of which it is a vital principle. In this contract, each party is bound to conduct himself towards the other, not only with integrity but with the most unreserved openness and candor; and they ought mutually to disclose to each other every circumstance which can in any degree affect the risk. It seldom happens that any such circumstance lies within the knowledge of the underwriter; fraud is seldom imputable to him, and he is much oftener the victim of his own credulity. But the law watches, with a jealous eye, the conduct of the insured, from whom the underwriter must, in most cases, learn all the facts and circumstances from which he makes his calculations, and appreciates the risk. Every material representation is considered as forming an ingredient in the contract, and every material misrepresentation or concealment is therefore deemed a fraud, and will void it.”

The author then indicates he will discuss each of these points in separate chapters, which, of course, he does.

Quinn’s Comments

Three points are of immediate interest. First, the law of good faith and bad faith–or part of it, anyway–is no stranger to insurance law. Second, at the same time, the focus then pertained to purchasing insurance and the protection of the insurer, whereas today–and this is the third point–the law of insurer bad faith mostly pertains to claims handling and is designed to protect the insured. 

At the same time, it is worth remembering that the law of good faith has current existence in contract law in American, though it does not occupy a central role in the practice of law or in judicial reasoning. See Steven J. Burton and Eric G. Andersen, CONTRACTUAL GOOD FAITH: FORMATION, PERFORMANCE, BREACH, ENFORCEMENT (1995). This book contains a chapter on good faith in the context of performance under contracts. (There are other scholarly sources discussing the law of good-faith versus bad-faith in the general area of contract law, and it figures in the Restatement (Second) of Contract, as well as the Uniform Commercial Code, but none of this makes it anything like a central feature of insurance litigation.

For some recent Texas history on this matter, see T. Ray Guy, “Good Faith Revisited: Extra-Contractual Duties in Texas,” 81.8 Tex. BAR J.,  608 (September 2018). Guy reports on several Texas cases on this matter. All of them are hostile to the idea of a duty of good faith and fair dealing being introduced into Texas jurisprudence as a tort. I have wondered for some years now, why it could not simply be treated as what it really is: part of the contract, an implied term, covenant, or warranty. Of course, it’s a vague-ish looking term, but so what? Contracts involve mutual agreements. Parties can agree to use general, abstract, and even vague language, so long as one party does not do something like insert a term, in bad faith,  

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TEXAS INSURANCE BAD FAITH MENCHACA II (PART EIGHT)

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Menchaca II

USAA v. Menchaca, 545 S.W.3d 479 (Tex. 2018)

Quinn’s Part Eight

This Part–the last one–is no longer a discussion of particular opinions, whether an exposition, discussion or critique.  It is a bit of speculation.  I will not be speculating on why this case became a landmark case, which it surely has. No doubt the legal fees, in this case, added up to as much as several hundred thousand dollars, while the potential recovery was quite small–hundreds of percentage points smaller. (One might even imagine that there was a “political” or “ideological” clash near or at the bottom of all this.) 

 I am much more interested in wondering why Question l and Answer 1 got formulated as they did and wondering what might have happened if it had been formulated differently. 

Q#1 could have been formulated in a much better way–really, in several much better ways. If it had been done differently, it is quite possible that there would have been no appeal or no appeal anything like the one that is now famous, or infamous, depending on your point of view. 

This speculation begins with a fundamental truth of insurance law, and that is this. All ambiguities in contracts of insurance are to be interpreted in favor of the insured if that alleged ambiguity reasonably corresponds to different available meanings in language as commonly used, and the alternative meaning proposed by the insured is to be adopted for interpreting the contract, even if the one proposed by the insurer is more reasonable. 

How could this rule be otherwise since all contracts of insurance presuppose a “special relationship” between the insurer and insured, where the “special relationship” requires the insurer to treat the interests of the insured as at least equal to its own. The “special relationship principle” was designed to be a great equalizer between insureds and insurers and thereby protect policyholders from behemoth sized companies. The Opinion of the Court, in this case, recognizes that fact. (Of course, all semantics in the interpretation of contracts, among at least some other documents, are legal matters and therefore for judges to decide, as opposed to finders of fact. 

None of the foregoing is controversial. 

One can plausibly argue that the word “term” is ambiguous in a variety of ways. One of the ways it can be ambiguous in contract interpretation begins with the proposition that it might mean either a word (or phrase, or clause), on the one hand, or a provision, on the other. Obviously, a provision is one thing, while a linguistic or semantic unit is another–indeed, they are quite different. Clearly, the idea of term-as-provision is the one a rational court would have to adopt, since it is reasonable, or so the argument would go.

Now here’s another ambiguity. Some provisions are explicitly set forth in contracts of insurance while others are implied, just as is the case in all contracts. This point is so obvious, that it might not even depend on an ambiguity. The law has recognized implied provisions in contracts for as long a several hundred years–or a very long time, anyway.

What if an implied term in property policies–or homeowner’s policies, at least–is that all determinations as to whether, and by how much, or in what amounts, a deductible clause applies to a given claim, must be determined with considerable exactitude and suppose further that this requirement can be met only by careful investigation on the part of the insurer. (Of course, the insured must also perform a suitable investigation in order to establish coverage.)

Now, in the Menchaca case, there was apparently not a satisfactory investigation. What if that requirement was thought of as a “term”–an implied term, if nothing else, in the policy. If that’s true, and if the jury was properly instructed, then its answer to Question 1 would have been “Yes” and not “No” (or so the argument would go).

If the jury answered Question 1 in the affirmative, the judge would not have disregarded Answer 1, and the main, foundational, controversy in the Menchaca case would disappear. If there had been an appeal in this case at all, it would have been quite routine, and there would have been no landmark Supreme Court decision arising out of it. 

Of course, that type of giant decision might be found in another Supreme Court decision, at around this point in time, maybe. Then again, perhaps not.

Having laid all this out, it is to be remembered that this part of the eight-part blog entry on Menchaca II in “Quinn’s Commentaries on Insurance Law” is nothing more than speculation. 

Michael Sean Quinn, Ph.D., J.D., C.P.C.U., Etc
1300 West Lynn Suite 102

Austin, Texas 78703

mquinn@msqlaw.com

(512) 656-0503

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TEXAS STATUTORY INSURANCE BAD FAITH –HECHT’S OPINION (QUINN’S PART SEVEN)

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MENCHACA II

USAA v. Menchaca, 545 S.W.3d 479 (Tex. 2018)

Chief Justice Hecht’s Opinion

Quinn’s Part Seven

Justice Hecht’s brilliant opinion is two pages long, once style and signature are set aside. 

He concurred in the judgment of the court remanding the case to the trial court for a new trial but not for the reasons set forth by Justice Boyd in the Opinion of the Court.  Justice Hecht concurred in parts of the plurality Opinion of the Court and concurred in the Dissenting Opinion’s analysis as to how preservation-of-error should be thought about in this case. That discussion need not be discussed here since it is not really a matter of insurance bad faith law. 

Quinn Comment. The topics of fatal error, fatal conflict among answers of the jury,  and fundamental error are jurisprudentially fascinating but are rare situations. The general problems involving in the preservation of error and objections are a much broader and important problem in civil procedure at both trial and appellate levels.  

Justice Hecht begins by observing that the Supreme Court unanimously rejects something the parties agreed on all through the case following the rendering of the verdict, namely, that the jury’s answers to the questions put to it do not conflict. They do, said he. 

Justice Hecht agrees with Justice Boyd that “the trial court cannot render judgment on fatally conflicting jury answers[.]” However, Justice Boyd reasoned that a court of appeals could not reverse unless there had been an objection in the trial court from the appellant.  

Here’s the “rub,” Justice Hecht says. USAA couldn’t object. It falsely believed that the answers did not conflict, as did the plaintiff. Thus, neither of them could object, since both thought the decision and reasoning in the trial court supported his Hence, this case never should have come to a court of appeals. It should have been set aside in the trial court and scheduled for retrial. This step was necessary to correct for the trial court’s error in disregarding A-1 to Q-1. Neither party could object; the trial judge erred; so the case must be retried. 

Justice Hecht might well have said that all three “players” made at least one mistake each, so “a retrial is the only way to correct the trial court’s error given the parties’ erroneous positions.” The trial judge never should have made the mistake he did. His mistake alone is what requires a retrial.

On the other hand, while Justice Green’s dissenting opinion would decide the case in favor of USAA, that position ignores the fact that the jury’s answers to Q2 and Q3 are sufficient to support a judgment in favor of Menchaca. They “establish that USAA failed to comply with its policy, yet the jury refused to make that finding in answer to Question 1. Menchaca cannot prevail because the jury answers were conflicting, not because they were insufficient.”

Quinn’s Comment.  Does it make any difference that Justice Hecht’s Opinion is worded in terms of “complying with its policy,” while Q-1 was written in language regarding “complying with terms of the policy”? See Part Eight for a speculative comment. 

Michael Sean Quinn, Ph.D., J.D., C.P.C.U., Etc

2112 Hartford Rd.

Austin, Texas 78703

mquinn@msqlaw.com

(512) 656-0503

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MENCHACA II: DISSENTING OPINION (QUINN’S PART SIX)

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MENCHACA II

USAA Texas Lloyds Company v. Menchaca, 545 S.W.3d 479 (Tex. 2018)

Quinn’s Part Six

The Dissenting Opinion

This opinion is less than one third the length of the opinion of the court, yet it too covers a lot of ground. Roughly speaking, however, it concerns (1) the meaning and implication of the jury questions, (2) the answers the jury gave and their implications for a sound decision, and (3) what the sound decision of the Court should have been.  It is also about how the Five Rules are to be understood and how they interrelate. Finally, and perhaps chiefly, it is certainly about the law and rules of civil procedure when it comes to the preservation of error. (It may well become a classic in the jurisprudence of post-trial procedural law. One can easily imagine parts of the opinion of the Court, the dissenting opinion, and the Hecht opinion all being anthologized together as a kind of debate as to this part of procedural law–a rarity though it be.)

Little will be said here about the preservation-of-error parts of the dissenting opinion, however, since, although, they were and are very important to picturing how the Menchaca case ultimately worked from the point of view legal reasoning, they have little to do with the substance of statutory insurance bad faith law. (Of course, the Five Rules were originally formulated in the previous and withdrawn opinion of 2017. Upon rehearing, the Court unanimously approved and, as it were, reaffirmed those five rules as a central core of statutory insurance bad faith in Texas–the other core being the statutory language itself. 

What makes the opinion of Justice Green a dissenting opinion is that he and his fellow dissenters would not remand the case but hand victory over to USAA by providing Menchaca a take-nothing judgment. The logic of the argument is simple. It explicitly rests upon the Five Rules. 

Rule 1 requires that the insured establish that s/he be an insured under the policy at issue and that s/he has a right to benefits under that policy. This is a long-established principle of insurance law and, indeed, of contract law in general. (After all, almost always, one cannot recover for breach of contract, if one is not a party to the contract. (Like many central legal principles, there are narrow exceptions.))

When the jury in effect said “No. USAA did not fail to comply with the terms of the insurance policy with respect to the claim for damages filed by Gail Menchaca resulting from Hurricane Ike,”  the jury rejected the proposition that USAA breached the contract. But proving that USAA had breached the contract of insurance in at least one relevant way was part of Menchaca’s burden of proof. If she failed to discharge that burden,  then she has no right to recover. 

It is pertinent to remember how the contract and USAA’s refusal to pay fit together. The loss was a storm-caused loss to a dwelling. The insurance policy was a homeowner’s policy. There was coverage in a broad sense of the term for her loss. The problem was that the extent or amount of her loss fell within the deductible written into the policy. USAA had to some degree investigated Ms. Menchaca’s loss twice.  

The refusal-to-pay conversation can be imagined to have gone like this: “Ms. Menchaca, your type of loss falls within the substantive terms of the policy. However, the size of your loss is below the lower limits of the policy, or what is usually called a ‘the deductible.’ Hence, we have no obligation to pay under the policy.” As the dissenting opinion puts it: “the jury rejected Menchaca’s claim that the policy required USAA to do something that it failed to do.” But, “Menchaca can recover damages in this case only if she established a right to receive unpaid benefits due under the policy.” Because she did not do this, the Court should “render judgment in favor of USAA.”

Quinn’s Comment.  Put another way, the logic goes like this, maybe. Menchaca was a party to a contract of insurance with USAA. USAA did not breach the contract in any relevant way. [Nor did she for that matter.] Therefore, USAA did not breach the contract by denying coverage. If its denial of coverage was not wrongful, i.e., if it was  USAA’s legal right to deny coverage, then R-1 is not met, since Menchaca did not establish her having a right to coverage under that contract under the particular relevant circumstances. If an insured’s claim is within the deductible of a given policy, the insured’s loss may be the type of event which is covered, but the size of the loss does not bring it within the policy’s lower policy limit(s). 

Quinn Comment. The idea of coverage–the meaning of the term “coverage”–can be slippery. The word can mean “the type of even for which payment is or may be due under the policy”; or it can mean a “loss of the right type which falls within policy limits.” Lawyers sometimes confuse these two ideas, and often the terms are used interchangeably. Insurance people, including coverage lawyers, know the difference. An even more confusing part of the usage of the term “coverage” arises out of the status of exclusions from coverage. Is such a loss covered and then excluded, as it were,  or is it never covered, conceptually speaking, since it falls within an exclusion. (Notice the use of the term “term” in this Comment. Maybe there is a lesson to be learned here.)

Much of the rest of the dissenting opinion which concerns the application of the Five Rules is short and clear, at least in appearance. Consequently, the rest of Quinn’s Part Six will follow the language of Section II the dissenting opinion, which is entitled, “Right to Receive Policy Benefits. (The same outlook is repeated in Section IV of the opinion, entitled “Conclusion.”)

An insured, such as Menchaca in his case, “cannot use a statutory violation theory of recovery to recover the very same contract damages that the jury specifically rejected.” To grant judgment to Menchaca would be to violate the “no-recovery” rule, that is, R-5. Under that rule, “an insured cannot recover any damages for an insurer’s statutory violation without establishing either the right to receive policy benefits or an independent injury. An insurer’s statutory violation does not, by itself, establish entitlement to policy benefits.” “The Court’s general rule [R-1] yields the same result. Under the general rule, if the insured does not have a right to benefit under the policy, she cannot recover policy benefits as damages for an insurer’s statutory violation. The jury’s answer to Question 1 rejected Menchaca’s claim that she has a right to unpaid benefits under the policy. Therefore, under the general rule [R-1], Menchaca is not entitled to recover policy damages for USAA’s Insurance Code violations. The plaintiff bears the burden of proving her case and obtaining jury findings to support a judgment in her favor. Here, Menchaca has not discharged her burden and is not entitled to a damages award for USAA’s statutory violation. As a result, there is no reason to remand the case.”

“The court’s remand suggests an exception to the no-recovery rule–that an insured may recover policy benefits as damages for a statutory violation despite an insured’s failure to prove entitlement to policy benefit and a jury’s answer that the insurer did not breach any of its obligations under the policy. When the jury found liability on only one basis–a statutory violation–and the plaintiff failed to prove entitlement to policy benefits and failed to seek damages for an independent injury [R-4], the plaintiff is not entitled to recover any damages. Applying the Court’s five rules to the facts of this case, I would hold that USAA is entitled to judgment in its favor.” 

Quinn Comment. See Part Eight of this blog series for a speculation on this matter.

Another Comment by Quinn.  Curiously, the dissenting opinion does not really focus on R-2. Supporters of the Court’s Opinion or that of Justice Hecht might see this as a fallacy in legal reasoning. A reader with a different skepticism might wonder what the just thing to do is when the “Justice System” is faced with a jury question as poorly drafted as Q-1, the asking of which has been permitted and then not rejected or found objectionable by justice-seeking officers of the court. 

Michael Sean Quinn, Ph.D., J.D., C.P.C.U., Etc

2112 Hartford Rd.

Austin, Texas 78703

mquinn@msqlaw.com

(512) 656-0503

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Menchaca II: JURY ANSWERS AND QUESTIONS (QUINN’S PART FOUR)

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Menchaca II: The Jury Verdict & Post Verdict Motions 

USAA Texas Lloyds Company v Menchaca, 545 S.W.3d 479 (Tex. 2018)

Quinn’s Part Four

Section III of the Opinion of the Court (Boyd’s Plurality Opinion) entitled “Menchaca’s Claim Against USAA”  grows out of the questions that the jury was asked to answer, the wording of the questions, and the lower court’s realization that something went wrong with the questions sent to the jury, plus the refusal of the parties to think about what was going on. 

The whole thing was a mess. The instructions were inadequate; the questions were badly formulated, and the questions invited and permitted conflicting answers. In fact, before getting to the really procedural parts of the opinion, the parties asked the court for guidance as to how to formulate questions is a good day. The court refers to the parties to existing sources for guidance. (In other words, the Court very gently admonishes the litigants to read the rules and the exemplars to be found in the Pattern Jury Charges, keeping in mind that cases are unique and that conflicts are to be avoided.

Although there was unanimity on the Court as to the Five Rules (R1-R-5), unanimity ended there. Consequently, there are three separate opinions as to what are principally matters of trial procedure, for at least some insurance bad faith cases. 

Before turning to these opinions, however, it might be a good idea to take a look at, roughly speaking, what the jury did. It is only necessary to take a look at three of the jury’s answers to the relevant questions put to it since from that the questions it was given are easily inferred. 

The following is something like a summary of the questions and answers put to the jury:

Answer to Q1(more or less): 

Ans#1: No: USAA did not fail to comply with the terms of the insurance policy with respect to the claim for damages filed by Gail Menchaca. 

Q#1: Did USAA Texas Lloyds Company (“USAA”) fail to comply with the terms of the insurance policy with respect to the claim for damages filed by Gail Menchaca. 

[Quinn’s Comment. Yellow added to draw focus. Might the use of the word “term” when characterizing a contract be a source of difficulty?] 

Answer to Q2 (more or less)

A#2:  Yes.  USAA engaged in an unfair or deceptive act or practiced that caused damages to Gail Menchaca, namely, it refused to pay a claim without conducting a reasonable investigation with respect to the claim at issue. 

Q#2: Did USAA  engage in any unfair or deceptive act or practice that caused damages to Gail Menchaca?

[Quinn Comment. Q#2 asked about several types of ways an insurer could violate the statute. The jury answered only one of the alternatives in the affirmative, so that is the only one set forth and discussed here.] 

Answer to Q3 (more or less)

A#3: Yes: USAA’s statutory violation resulted in Menchaca failing to receive $X, the amount she should have been paid.

Q#3: What sum of money. . . would fairly and reasonably compensate Menchaca for her damages, if any, that resulted from the failure to comply you found in response to Question number 1 and/or that were caused by an unfair or deceptive act you found in response to Question number 2.  [Quinn Comment: “and/or” is yellowed, since it plays an important role in the decision, although one would never know that from a superficial reading.]

After the jury returned this verdict, the trial judge said he thought there might be a conflict and asked if anyone wanted the matter returned to the jury for further thought and verdict. Both parties said that they saw no conflict and hence no reason to return the verdict to the jury. The parties strummed the same tune in the court of appeals and sang it in the Supreme Court.

Quinn Comment. This paradoxical response to a reasonable, judge-asked question is not a great tribute to lawyer epistemology.  In fact, one might think there was lawyer jockeying going on here and not the pursuit of coherence, truth, and justice. (Whoever thought that zealous adversity on the legal battlefield is conceptually or empirically linked to epistemological soundness or devotion to any love of logical validity?

Other Quinn Comments. (1) One of the things this case turned on was the use of the “and/or” phraseology. That is almost always a bad idea. (2) Notice the word “damage” is used in two different ways in the questions.  I wonder if that equivocation played any role in the jury discussions and decision. (3) Think about the word “term” that occurs in Q-1. Maybe this is just scholastic rumination, but I wonder if the term “term” and its various meanings–“actual term,” “explicit term,” “implied term,” and so forth, played a negative rule in the Q-1 and therefore in the whole case.  See Quinn Part Eight.

A Last Quinn Comment: In reading, reviewing and studying these opinions, one must keep in mind that there are two different numbering systems, one system for the jury questions and answers, and another system for the Five Rules.

Michael Sean Quinn, Ph.D., J.D., C.P.C.U., Etc

2112 Hartford Rd.

Austin, Texas 78703

mquinn@msqlaw.com

(512) 656-0503

 

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In different situations, even propositions which appear undeniable may not be true in all situations.~Michael Sean Quinn, PhD, JD, CPCU, Etc.Tweet

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