The “Independent Injury” in Texas Insurance Statutory Bad Faith Law

The idea of “independent injury” is part of the Texas laws of bad faith. It is about damages with a special origin, and perhaps, a new cause of action; it is as a cause of action that it should be pleaded, I think. As virtually all lawyers know, pleading something as a cause of action will not change how it is treated, by a court, even if it is not actually a separate cause of action. If the insurer files a special exception and the court agrees, then simply replead. One might consider pleading it redundancy, both as a cause of action and as a kind of damages.

The most recent explication of the idea of “independent of,” and therefore “separateness,” is to be found in the Texas Supreme Court’s mandamus opinion in a UIM case partly styled In re State Farm Mutual Auto Ins. Co., 19-0791 (Tex, March 19, 2021). See especially its Section III.A. The court calls “independent injury” as a second way to obtain damages under the applicable state, and it is the only way to do this without proving coverage. It is also covered briefly in the short, curiam opinion  Biasatti v. GuideOne National Ins., 18-0911 (Tex. April 17, 2020). The GuideOne case involves an appraisal “proceeding,” something that has yet been a feature in this case.

It is a good thing to keep in mind the U.S.A.A. v. Menchaca [II],  545 S.W.3d 479 (Tex. 2018), virtually the “Grand Master” of the problems being discussed herein and virtually all of first-party Texas insurance bad faith law. (I am using the word “virtual” and “virtually” in an old-fashioned way, where the term means, roughly, “almost.”)

The inclusion of “[II]” is my notation and is intended to indicate that the controlling case is a rehearing of the whole case earlier decided.

The majority in Menchaca [II]  recognized that the standard way to prove insurer bad faith is to prove-up insurer breach of contract but it recognized (or created) a second route to proving bad faith and it called this alternative approach the “second path to recovery.”  The second route requires proof of a special sort of damage(s) independent of breach of contract, and it must be extreme in nature.

—MSQ

The State Farm Mutual case, under discussion here, where there was a majority, is one of the most important cases regarding insurer bad faith in the last few years, even though several cases follow Menchaca [II] in the year or so after it was decided See Barbara Tech. and Ortiz.

In the case I am discussing here, In re State Farm, high Court indicated that an independent injury could be an injury that canceled out (or overrode) the insured’s duty to prove coverage and breach of contract before that insured could proceed on the basis of alleged statutory insurer bad faith. This idea is to be found in a precedential portion of Menchaca [II], 545 SW3d 479 (Tex. 2018), and in a couple of earlier decisions mentioned in Menchaca [II], as well as two of the decisions following Menchaca [II], mentioned in the last paragraph.

To succeed in this move the injury must be “independent” of any claim under–or recoverable under–the policy, and the damages must not be the sort of thing that is or would be covered upon the policy if there is (or were) a breach of the insurance contract. It must also be “extreme.”

A typical example of “extreme” would probably be that the insurer performed actions making it impossible for the insured to report an injury or make a claim. Maybe the insurer’s conduct “being outrageous” is evidence of “being extreme,” but that conduct must be outside processing the claim.

If an insured has proceeded with filing a claim seeking first-party coverage under the policy, and the insurer has responded to it, incorrectly–even wretchedly., it is hard to see how “independent damage” can be established. Then again, Black Swans exist.

Of course, there can be “routine” bad faith damages after coverage is established or put in play, but the bad faith damages  are not “independent” in the special legal sense created by the Supreme Court. Under most circumstances, damages independent of both insurer breach of contract and insurer bad faith are not an “additive” obtainable in addition to damages for breach of contract and statutory bad faith.

Ultimately, if a breach of contract is proved, there may also be damages resulting from the insurer’s bad faith  (i.e. not to be found in the breach of contract, and consequential damages resulting from that breach). However, those damages may not be used to circumvent the requirement of proof regarding the breach of contract.

Of course, that is no problem in this case about that matter, since breach of contract was pleaded, whether or not there is an issue of coverage, as opposed to damages only.

In the case styled In re State Farm Mutual, a mandamus decision of 2021 could be promising, although it must be remembered violations of the applicable statute in processing a claim probably may not fall within “independent injury,” although statutory violations can be a source of damages once coverage is proved.

One might argue that there are two senses of the term “independent” in Texas insurance bad faith law.  (1) One sense is the so-called second route to bad faith outlined by  Menchaca II and its progenies, (2) while the other sens of the word is the kind of damages that are recoverable under the  Texas law of bad faith when breach of contract has been pleaded and proved.

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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