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

Michael Sean Quinn, Esq., Ph.D., JD, CPCU, Etc. 

Quinn’s Part Two

One can imaginatively hear the Justices talking to each other. “Golly Gee. We’ve created a mess last time around. We didn’t mean to. There wasn’t any judicial bad faith here or even judicial negligence. But a mistake there certainly was. We, lower court judges, counsel, adjusters, and legal scholars (such as they are) have been left in the wilderness. [Not that the “Wilderness,” we’re in Texas, not Virginia.] Alas, we’ve left a rough spot in judicial opinion writing. In a common-law modeled, precedental system of judicial decision-making, we can’t provide only that to our flock.  We’ve got to straighten this out.  What an irony it is that this should get so filed up, and for two reasons. First, we wrote the damn opinion to deal with confusion “everyone” things we left behind us over the last generation or so. Second, we left procedural paradoxes that can be manipulated. So, it’s back to the drafting board.”  

Perceived Principle. When the legal community has been left in confusion by the courts, the court of last resort must go back to more-or-less fundamental principles that are definite, reliable, and known, and start over again, more or less.  Interestingly, this happens very seldom in common law practice, and then it happens most often in the common law of torts, e.g., products liability law, etc., 

I. Background

Gail Menchaca (Id) had a house. There was a storm, “Ike” by name. Ms. Menchaca filed a claim with her insurance company, USAA (Ir). Its adjuster inspected the property. He believed that some of her losses were covered, but some were not, and what was covered fell within the deductible.  Consequently, Id had no right to receive money (or benefits) under the policy. A second adjuster came to the same conclusion sometime after the first adjuster inspected the property. Along the way, Ir told Id that she was not entitled to payment of benefits. Coverage, in and of itself, was not an issue. Valuing the loss was the issue. (Of course, once could say that there was coverage only if and to the extent the amount of the loss exceeded the limit set up by the deductible.)

Ms. Menchaca sued.  At the end of her jury trial, the jury, roughly speaking, said that Ir had not breached the contract of insurance but had violated a bad faith statute by failing to conduct a reasonable investigation before denying the claim, even though its denial of the claim was correct. In other words, Ir did the right thing under the contract, but without having sufficient evidence for doing what it did. Thus, it lacked a reliable epistemic foundation and so lack the rational foundation for what it did. 

A Quinn Comment. One can imagine a policyholder lawyer saying, “Wait a minute. Given what insurers do, and given that they are dealing with people who have suffered losses, surely our social order should require that their claims decisions have reasonable bases every time.  Surely we need a legal system that will ensure that insurers investigate thoroughly, investigate promptly, and reason well. (Or, the system will at least encourage them to do things this way by using damages as a kind of penalty for less than acceptable conduct.) It’s a form of using the adversarial legal system as a device for strongly encouraging, if not ensuring, justice.” ]

Back to the court. The jury said that Ms. Menchaca was entitled to damages if either USAA breached the contract or it violated the statutory bad faith law. (And, of course, it would be liable for the same damages if it breached the contract and violated the law.)

This can’t be right, said the insurer. So there was a post-verdict battle. There were motions. The trial court grasped Ir’s point, and so ignored the question that asked about contract breach (“No there wasn’t any breach.”), looked solely at the jury answer the question about bad faith, (“Yes there was statutorily forbidden bad faith.”), and then entered an award if damages of slightly less than $12,000.00, the same sum that would have been awarded had a breach of contract had been found.

Another Quinn Comment. Given the small size of the damages, when one looks at it from every point of view other than that of Ms. Menchaca, one might ask, “What was the big fight about.  Insurers settle cases of this sort all the time, if for no other reason than to avoid the expense of lawyers. And policyholder lawyers rarely take cases this size, for obvious reasons.” The answer is this: the question in controversy was so important that it needed resolution, and the “Menchaca Predicament” was the perfect place to fight it out, at least from the point of view of the insurance company–not much to lose, and the policyholder lawyer was “locked in place,” sorta.]

So what happened? Take a look at my previous Blog on Menchaca I. (5/22/17) The insurance company was profoundly dissatisfied with the Supreme Court’s first opinion, so it asked for a rehearing, and the court agreed–a rarity. In its new opinion, Menchaca II, unanimously affirmed what it had written before, as to fundamental, substantive principles but decided to clear up confusions as to trial procedure. It will take a decade or more to see if it really has done this. Since it remanded this case, one wonders what will really happen in it. 

Another Quinn Comment. In my opinion, it achieved something far more important. It created a structural scheme in which IBF arguments must be given. Briefing at all court levels will now take the same appearance as too form. A group of explicit categorizations–the Court’s five substantive rules–must now be deployed in making arguments. That may be a good thing.  It creates what looks like and may usually be, a stable and clear schema for the presentation of arguments. The only obvious difficulty in the new rhetorical system is that some lawyers will feel that they must try to get their overall arguments to fit into all five categories at once.]

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

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Austin, Texas 78703
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