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 (Of course, the Five Rules were originally formulated in the previous and withdrawn opinion of 2017.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 QuinnCuriously, 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
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