Kay Morgan | Property Insurance Coverage Law Blog | June 17, 2018
Having undertaken to write about “all things Menchaca,” this month is a review of five cases post-Menchaca which contradict one another in deciding whether the independent injury rule is dead or alive. Looking at the first set of cases post-Menchaca, it appears that the answer to that question is a long way off.
In my last blog post, The Independent Injury Rule is Dead, the Fifth Circuit Court of Appeals in Aldous v. Darwin National Assurance Company, cited the April 13, 2018, USAA Tex. Lloyds Company v. Menchaca opinion and declared,
“Menchaca repudiated the independent injury rule, clarifying instead that “‘an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as ‘actual damages’ under the statute if the insurer’s statutory violations causes the loss of benefits.’”1
Aldous involved a legal malpractice suit with a multitude of issues, counterclaims and cross-appeals.2 The underlying suit concerned litigation over two trusts and following the finality of that litigation, Aldous’ client brought a malpractice suit against Aldous which triggered her professional liability insurer, Darwin’s involvement. Aldous was successful in the malpractice suit but then sued Darwin alleging that Darwin did not pay enough to fully cover the costs of her malpractice defense. Aldous alleged against Darwin breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code, among others. The court found that Aldous’ Chapter 541 Texas Insurance Code claims were barred as a matter of law under Parkans International LLC v. Zurich Insurance Company3 because Aldous had not established an injury independent of the injury that would have resulted from a wrongful denial of policy benefits. Aldous appealed the results of her suit against Darwin and in particular, asked the Fifth Circuit to reverse Parkans. After finding that “Menchaca repudiated the independent injury rule” as quoted above, the Fifth Circuit wrote: “[p]ut simply, Parkans’s categorical bar does not hold up in the face of Menchaca.”4
Subsequent to Aldous, the Amarillo Court of Appeals in Turner v. Peerless Indemnity Insurance Company,5 declared the opposite of the holding in Aldous by the Fifth Circuit. The Turner court held: “[t]he independent injury rule is alive and well, as reiterated by the Texas Supreme Court in its recent Menchaca opinion and recognized by us in Abdalla, 2018 Tex. App. LEXIS 3358, at *9-10.” Turner is the first appraisal case that has applied the April 13, 2018, Menchaca opinion. Following appraisal, as is the routine with all insurance companies, Peerless moved for summary judgment on all of Turner’s claims and the court granted it. The Amarillo Court of Appeals affirmed the trial court’s dismissal by summary judgment of Turner’s breach of contract and extra-contractual claims. In affirming the dismissal of the extra-contractual claims, the court determined that Turner had failed to provide any evidence of an independent injury upon which to base his extra-contractual claims aside from the damages represented by supposedly lost policy benefits. In affirming the trial court’s granting of summary judgment on Turner’s extra-contractual claims, the Turner court made an extensive review of Menchaca’s discussion of the independent injury rule.6 The court rejected Turner’s contention that the damages in the policy benefits he lost due to Peerless’ statutory violations can be recovered under the bad faith statute, and instead found:
As can be seen, his [Turner’s] argument remains focused on the benefits recoverable under the policy, which benefits have already been paid. But, under what we perceived to be Menchaca’s explanation of the independent injury rule, his injury cannot be so predicated. It must be independent of what he claims he lost ‘out on’ under the policy. Thus, the decision to grant summary judgment upon the extra-contractual claims urged by [Peerless] has the support of at least one ground, and we overrule the second issue.7
Thus, the Amarillo Court of Appeals in Turner finds that the independent injury rule is alive and well. The same panel of Amarillo judges in Turner wrote the opinion in Abdalla, another appraisal case, and in relevant part, stated:
The need of an independent injury to support extra-contractual causes of action was reaffirmed in Menchaca. After discussing its own precedent, the Supreme Court first reiterated that ‘an insured can recover actual damages caused by the insurer’s bad faith conduct if the damages are separate from and…differ from benefits under the contract.’” [Cites omitted.] Then, it observed that damages were recoverable ‘only if [they] are truly independent of the insured’s right to receive policy benefits.’8
Two more opinions citing Menchaca were handed down on June 6, 2018: another Fifth Circuit opinion, Certain Underwriters at Lloyd’s of London v. Lowen Valley View,9 and another Texas Supreme Court case, State Farm Lloyds v. Fuentes.10
In Lowen Valley, the insurer brought a declaratory judgment action that it owed no benefits under a commercial property insurance policy and the insured, Lowen Valley, counterclaimed for declaratory judgment, breach of the insurance contract, and violations of the Texas Insurance Code. The district court granted summary judgment in favor of the insurer on all claims and the Fifth Circuit affirmed. In reaching that decision, the Fifth Circuit found that Lowen Valley’s Texas Insurance Code claims were based on unpaid coverage benefits rather than some independent injury and when Lowen Valley’s breach of contract claim fell, so did its extra-contractual claims. The appellate court wrote:
See USAA Tex. Lloyds Co. v. Menchaca, 14-0721, 2018 WOL 1866041, at *5 (Tex. 13, 2018) (“[A]n insured cannot recover any damages based on an insurer’s statutory violation if the insured had no right to receive benefits under the policy and sustained no injury independent of a right to benefits.”).11
The final case this blog, State Farm Lloyds v. Fuentes, was a Hurricane Ike suit and following a trial, the trial court disregarded two jury’s findings that the Fuenteses had breached the insurance contract as well as State Farm and that the Fuenteses had breached it first. The trial court rendered judgment for the Fuenteses, awarding them $18,818.39 for amounts owed under the policy, $27,000 for mental-anguish damages, $7,527 in statutory penalties, and more than $300,000 in attorney’s fees. State Farm appealed. Houston’s Fourteenth Court of Appeals affirmed the trial court judgment. State Farm appealed again. The Texas Supreme Court held:
[We] conclude simply that the considerations that led us to remand for a new trial in Menchaca similarly dictate that State Farm’s first issue—whether the trial court properly disregarded some of the jury’s findings—should be remanded to the court of appeals for reconsideration in light of Menchaca. See TEX. R. APP. R. 60.2(f).12
Interestingly, both Fuentes and Menchaca involved a trial court’s disregarding specific jury findings in reaching their judgments and both have been remanded for new trial. In Fuentes, the trial court disregarded two jury findings that Fuentes breached the contract and breached it first before State Farm, who was also found to have breached the contract. The Fuentes court remanded the suit to the court of appeals in light of Menchaca. In Menchaca, the trial court disregarded jury question No. 1 in which the jury found that USAA had not failed to comply with its obligations under the policy. The supreme court found that that the trial court erred in disregarding the jury’s answer to question No. 1. The court also held that a plaintiff does not have to prevail on a separate breach of contract claim to recover policy benefits for a statutory violation. Menchaca was remanded to the trial court for a new trial.
In addition to these two appeals, more new cases relying on Menchaca will continue to trickle down and, no doubt, that trickle will bring more new interpretations. It is still too early to definitively declare whether the independent injury rule is dead or alive.
1 Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. May 11, 2018)(emphasis added).
2 See Aldous v. Darwin National Assurance Co., 851 F.3d 473 (5th Cir. 2017).
3 Parkans International LLC v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002).
4 Id. (emphasis added).
5 Turner v. Peerless Indemnity Ins. Co., 2018 WL 2709489 (Tex. App.—Amarillo June 5, 2018).
6 Id. at 2018 WL 2709489, at ** 3-5.
7 Id. at 2018 WL 2709489, at *5.
8 Abdalla v. Farmers Ins. Exch., 2018 WL 2220269, at * 5 (Tex. Civ.—Amarillo, May 14, 2018).
9 Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC, No. 17-10914 (5th Cir. June 6, 2018).
10 State Farm Lloyds v. Fuentes, No. 16-369, 2018 WL 274919 (Tex. June 6, 2018).
11 Lowen Valley at 8. (emphasis in the original).
12 Fuentes, 2018 WL 2749719, at *2.