Usaa Texas Lloyds Company v. Gail Menchaca

• Court: Texas Supreme Court
• Decided: April 7, 2017
• Docket: 14-0721
• Status: Published

Opinion

IN THE SUPREME COURT OF TEXAS ══════════ No. 14-0721 ══════════

USAA TEXAS LLOYDS COMPANY, PETITIONER,

v.

GAIL MENCHACA, RESPONDENT

══════════════════════════════════════════ ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE THIRTEENTH DISTRICT OF TEXAS ══════════════════════════════════════════

Argued October 11, 2016

JUSTICE BOYD delivered the opinion of the Court.

JUSTICE JOHNSON did not participate in the decision.

When this Court decides a case by announcing a rule of law, the decision serves as “binding

precedent . . . when the very point is again presented in a subsequent suit between different

parties.” Swilley v. McCain, 374 S.W.2d 871, 875 (Tex. 1964). Yet as one of history’s most

renowned jurists once observed, “seldom will it happen that any one rule will exactly suit with

many cases.” 3 WILLIAM BLACKSTONE, COMMENTARIES *335 (1765). We have similarly

acknowledged that “it is at best difficult to avoid some uncertainties in the law because of the

varying facts attending the different cases.” Trapp v. Shell Oil Co., 198 S.W.2d 424, 427 (Tex.

1946). When our decisions create such uncertainties, “it is our duty to settle the conflicts in order

that the confusion will as nearly as possible be set at rest.” Id. Today we endeavor to fulfill that duty in this case involving an insured’s claims against

her insurance company. The primary issue is whether the insured can recover policy benefits based

on jury findings that the insurer violated the Texas Insurance Code and that the violation resulted

in the insured’s loss of benefits the insurer “should have paid” under the policy, even though the

jury also failed to find that the insurer failed to comply with its obligations under the policy.

Unfortunately, our precedent in this area has led to substantial confusion among other courts, and

that confusion has permeated this case. In resolving this appeal, we seek to clarify our precedent

by announcing five rules that address the relationship between contract claims under an insurance

policy and tort claims under the Insurance Code. Ultimately, because the trial court and the parties

lacked the clarity we provide today, and because their shared confusion prevented a proper

resolution of these claims, we reverse the court of appeals’ judgment and remand the case to the

trial court for a new trial in the interest of justice.

I. BACKGROUND

After Hurricane Ike struck Galveston Island in September 2008, Gail Menchaca contacted

her homeowner’s insurance company, USAA Texas Lloyds, and reported that the storm had

damaged her home. USAA sent an adjuster to investigate Menchaca’s claim, and the adjuster

found only minimal damage. Based on the adjuster’s findings, USAA determined that its policy

covered some of the damage but declined to pay Menchaca any benefits because the total estimated

repair costs did not exceed the policy’s deductible.1 About five months later, at Menchaca’s

1 The policy’s declaration page provides that the policy covers “only that part of the loss over the deductible stated,” and then lists the deductible amounts for “wind and hail” and for “all other perils.”

2 request, USAA sent another adjuster to re-inspect the property. This adjuster generally confirmed

the first adjuster’s findings, and USAA again refused to pay any policy benefits. Menchaca sued

USAA for breach of the insurance policy and for unfair settlement practices in violation of the

Texas Insurance Code.2 As damages for both claims, she sought only insurance benefits under the

policy, plus court costs and attorney’s fees.3

The parties tried the case to a jury. Question 1 of the jury charge, which addressed

Menchaca’s breach-of-contract claim, asked whether USAA failed “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 answered “No.” Question 2, which addressed Menchaca’s statutory

claims, asked whether USAA engaged in various unfair or deceptive practices, including whether

USAA refused “to pay a claim without conducting a reasonable investigation with respect to” that

claim. As to that specific practice, the jury answered “Yes.”4 Question 3 asked the jury to

determine Menchaca’s damages that resulted from either USAA’s failure to comply with the policy

2 Menchaca initially alleged a fraud claim, but it was not submitted to the jury. She also sued the first adjuster who inspected her property but later nonsuited those claims. Although the policy provided for an appraisal process to resolve disputes over the amount of covered losses, it appears that neither party ever invoked that alternative method for resolving this dispute. See --- S.W.3d at -- n.9. 3 As damages for USAA’s alleged breach of the insurance contract, Menchaca sought the “benefit of her bargain” under the policy, “which is the amount of her claim [for policy benefits], together with attorney fees.” As damages for USAA’s alleged statutory violations, she sought “actual damages, which include the loss of the benefits that should have been paid pursuant to the policy, mental anguish, court costs[,] and attorney’s fees.” She later disclaimed any mental anguish or consequential damages. 4 Question 2 also separately asked whether USAA engaged in an unfair or deceptive act or practice by: “Failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when the liability under the insurance policy issued to Gail Menchaca had become reasonably clear;” “Failing to promptly provide to Gail Menchaca a reasonable explanation of the factual and legal basis in the policy for the denial of a claim(s);” “Failing to affirm or deny coverage within a reasonable time;” or “Misrepresenting to Gail Menchaca a material fact or policy provision relating to the coverage at issue.” As to each of these specific practices, the jury answered “No.”

3 or its statutory violations, calculated as “the difference, if any, between the amount USAA should

have paid Gail Menchaca for her Hurricane Ike damages and the amount that was actually paid.”5

The jury answered “$11,350.”6

Both parties moved for judgment in their favor based on the jury’s verdict. USAA argued

that because the jury failed to find in its answer to Question 1 that USAA failed to comply with

the policy’s terms, Menchaca could not recover for “bad faith or extra-contractual liability as a

matter of law.” Menchaca argued that the court should enter judgment in her favor based on the

jury’s answers to Questions 2 and 3, neither of which was conditioned on a “Yes” answer to

Question 1. The trial court disregarded Question 1 and entered final judgment in Menchaca’s favor

based on the jury’s answers to Questions 2 and 3. The court of appeals affirmed, — S.W.3d —,7

and we granted USAA’s petition for review.

II. RECOVERING POLICY BENEFITS FOR STATUTORY VIOLATIONS

The parties agree that the damages the jury found in response to Question 3 represent the

5 Specifically, Question 3 asked: “What sum of money . . . would fairly and reasonably compensate Gail 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 that you found in response to Question number 2[?]” The question thus required the jury to determine damages resulting from either a contract breach or a statutory violation or both. The charge instructed the jury to answer Question 3 only if it “answered ‘Yes’ to Question No. 1 or any part of Question No. 2 or both questions.” The charge then instructed the jury that the “sum of money to be awarded is the difference, if any, between the amount USAA should have paid Gail Menchaca for her Hurricane Ike damages and the amount that was actually paid.” 6 The jury also found that Menchaca’s reasonable and necessary attorney’s fees “for representation in the trial court” totaled $130,000, and did not find that Menchaca failed to mitigate her damages or that USAA “knowingly” violated the Insurance Code. 7 The court of appeals modified the judgment to delete an award of penalty interest and affirmed as modified. — S.W.3d —. Menchaca does not complain here about that aspect of the court’s judgment.

4 amount of insurance policy benefits the jury concluded USAA “should have paid” to Menchaca.

USAA contends that Menchaca cannot recover any amount of policy benefits because the jury

failed to find that USAA breached its obligations under the policy. Although the jury did find that

USAA violated the Insurance Code, USAA contends that Menchaca cannot recover policy benefits

based on that finding alone.8 USAA primarily relies on Provident American Insurance Co. v.

Castañeda, in which we stated that an insurance company’s “failure to properly investigate a claim

is not a basis for obtaining policy benefits.” 988 S.W.2d 189, 198 (Tex. 1998). Menchaca argues

that the jury’s findings that USAA violated the Code and that USAA “should have paid” Menchaca

$11,350 sufficiently support the award of policy benefits. Menchaca primarily relies on Vail v.

Texas Farm Bureau Mutual Insurance Co., in which we stated that an insurer’s “unfair refusal to

8 Menchaca argues that USAA waived this argument because it (1) did not object that Question 2 was not predicated on a “yes” answer to Question 1; (2) did not request an instruction that the jury should answer “no” to Question 2 if they answered “no” to Question 1; (3) did not object to Question 2 on the ground that it imposed liability without a finding that Menchaca was entitled to benefits under the policy; and, (4) did not object to Question 3 on the ground that it permitted a recovery of policy benefits without a finding that Menchaca was entitled to benefits under the policy. USAA did object to Question 3, however, on the ground that the question impermissibly combined “contractual damages from Question 1 and statutory damages from Question 2, [because] Texas courts have held that extra[-]contractual damages need to be independent from policy damages.” USAA complained that submitting just one damages question for all damages arising either under the policy or under the statute or both would make it “unclear potentially if we get ‘yes’ answers to [Questions] 1 and 2 what the damages are based on.” We conclude that USAA’s objections were sufficient to make clear its position that contractual damages are independent from statutory damages and must be based on a finding that USAA breached the policy. See State Dep’t of Highways & Pub. Transp. v. Payne, 838 S.W.2d 235, 241 (Tex. 1992) (holding that an objection should make “the trial court aware of the complaint, timely and plainly”). We also conclude that USAA’s argument raises a purely legal issue that does not affect the jury’s role as fact-finder, and that USAA thus preserved the argument by asserting it as a ground for its motion for judgment based on the jury’s verdict. Hoffmann–La Roche Inc. v. Zeltwanger, 144 S.W.3d 438, 450 (Tex. 2004) (holding that when “the issue presented a pure legal question which did not affect the jury’s role as fact finder, the post-verdict motion [can be] sufficient to preserve error”); see also Felton v. Lovett, 388 S.W.3d 656, 660 n.9 (Tex. 2012) (citing Waffle House, Inc. v. Williams, 313 S.W.3d 796, 802 (Tex. 2010); Hoffmann–La Roche, 144 S.W.3d at 450; Holland v. Wal–Mart Stores, Inc., 1 S.W.3d 91, 94 (Tex. 1999)) (holding that “a purely legal issue which does not affect the jury’s role as fact-finder” may preserve error when “raised for the first time post-verdict”). Because USAA raises a purely legal argument that the jury’s failure to find a contractual breach precludes Menchaca from recovering policy benefits as a matter of law, USAA preserved error by raising the argument in its motion for judgment.

5 pay the insured’s claim causes damages as a matter of law in at least the amount of the policy

benefits wrongfully withheld.” 754 S.W.2d 129, 136 (Tex. 1988).

Courts and commentators have expressed confusion over our decisions in this area, and

over our statements in Castañeda and Vail in particular.9 The United States Court of Appeals for

the Fifth Circuit, for example, recently concluded that Castañeda and other “decisions from the

Supreme Court of Texas and Texas’s intermediate appellate courts arguably cast doubt on Vail’s

continued vitality.” In re Deepwater Horizon, 807 F.3d 689, 698 (5th Cir. 2015). In the Deepwater

Horizon panel’s view, the Fifth Circuit interpreted Castañeda “as setting out the opposite rule from

that in Vail.” Id. (citing Great Am. Ins. Co. v. AFS/IBEX Fin. Servs., 612 F.3d 800, 808 & n.1 (5th

Cir. 2010)).10 Today’s case presents an opportunity to provide clarity regarding the relationship

between claims for an insurance policy breach and Insurance Code violations. In light of the

confusing nature of our precedent in this area, we begin by returning to the underlying governing

principles. See, e.g., U.S. v. New Mexico, 455 U.S. 720, 733 (1982) (concluding that “the confusing

nature of our precedents counsels a return to the underlying constitutional principle”).

9 See, e.g., Richard G. Wilson, Policy Benefits—Are They Recoverable Under Extra-Contractual Theories When a Covered Claim is Denied?, 12 J. TEX. INS. L. 17, 23 (2014) (“In some circumstances, it appears that courts have simply failed to follow the Texas Supreme Court precedent that is Vail.”); Robert M. Hoffman & Jaclyn M. O’Sullivan, What the Insurance Code Giveth, the Courts Cannot Taketh Away: Judicial Confusion Over Whether Insurance Proceeds Can be Trebled, 11 J. TEX. INS. L. 23, 24 (2011) (“Unfortunately, it is easy to confuse the independent injury issue due to a line of cases that misapplied the 1998 Texas Supreme Court decision in . . . Castañeda.”). 10 In Deepwater Horizon, the Fifth Circuit certified to us the question of whether, “to maintain a cause of action under Chapter 541 of the Texas Insurance Code against an insurer that wrongfully withheld policy benefits, an insured must allege and prove an injury independent from the denied policy benefits?” 807 F.3d at 701. We accepted the certified question but later dismissed the cause as moot because the parties settled. See id., certified question accepted (Dec. 4, 2015) and dism’d as moot (Apr. 8, 2016).

6 The first of these principles is that an “insurance policy is a contract” that sets forth the

respective rights and obligations to which an insurer and its insured have mutually agreed. RSUI

Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015); see also Tex. Ass’n of Ctys. Cty.

Gov’t Risk Mgmt. Pool v. Matagorda Cty., 52 S.W.3d 128, 131 (Tex. 2000) (noting that an

“insurance policy . . . defines the parties’ rights and obligations”). Generally, we construe a policy

using the same rules that govern the construction of any other contract. See Ulico Cas. Co. v. Allied

Pilots Ass’n, 262 S.W.3d 773, 778 (Tex. 2008) (citing Forbau v. Aetna Life Ins., Co., 876 S.W.2d

132, 133 (Tex. 1994)). An insurance policy, however, is a unique type of contract because an

insurer generally “has exclusive control over the evaluation, processing[,] and denial of claims,”

and it can easily use that control to take advantage of its insured. Arnold v. Nat’l Cty. Mut. Fire

Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). Because of this inherent “unequal bargaining power,”

we concluded in Arnold that the “special relationship” between an insurer and insured justifies the

imposition of a common-law duty on insurers to “deal fairly and in good faith with their insureds.”

Id.

Similar to that common-law duty, the Insurance Code supplements the parties’ contractual

rights and obligations by imposing procedural requirements that govern the manner in which

insurers review and resolve an insured’s claim for policy benefits. See, e.g., TEX. INS. CODE

§ 541.060(a) (prohibiting insurers from engaging in a variety of “unfair settlement practices”). The

Code grants insureds a private action against insurers that engage in certain discriminatory, unfair,

deceptive, or bad-faith practices, and it permits insureds to recover “actual damages . . . caused

by” those practices, court costs, and attorney’s fees, plus treble damages if the insurer “knowingly”

7 commits the prohibited act. Id. §§ 541.151, .152; Tex. Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430,

441 (Tex. 2012).11 “Actual damages” under the Insurance Code “are those damages recoverable

at common law,” State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 435 (Tex. 1995) (citing

Brown v. Am. Transfer & Storage Co., 601 S.W.2d 931, 939 (Tex. 1980)), which include “benefit-

of-the-bargain” damages representing “the difference between the value as represented and the

value received,” Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 817 (Tex. 1997)

(citing Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369, 373 (Tex. 1984)). But the Code

does not create insurance coverage or a right to payment of benefits that does not otherwise exist

under the policy. See Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 600 (Tex. 1993)

(discussing the necessity of distinguishing bad-faith issues from “the contract issue of coverage”).

An insured’s claim for breach of an insurance contract is “distinct” and “independent” from

claims that the insurer violated its extra-contractual common-law and statutory duties. See Liberty

Nat’l Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex. 1996) (“Insurance coverage claims and bad

faith claims are by their nature independent.”); Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663,

666 (Tex. 1995) (noting that a bad-faith claim is “distinct” from a suit for breach of the policy);

Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995) (“[A] policy claim is independent

of a bad faith claim.”). A claim for breach of the policy is a “contract cause of action,” while a

11 Similarly, a claim for bad-faith conduct that breaches the common-law duty “can potentially result in three types of damages: (1) benefit of the bargain damages for an accompanying breach of contract claim, (2) compensatory damages for the tort of bad faith, and (3) punitive damages for intentional, malicious, fraudulent, or grossly negligent conduct.” Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 17 (Tex. 1994), abrogated on other grounds by U-Haul Intl. v. Waldrip, 380 S.W.3d 118, 140 (Tex. 2012).

8 common-law or statutory bad-faith claim “is a cause of action that sounds in tort.” Twin City, 904

S.W.2d at 666; see also Viles v. Sec. Nat’l Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990) (“[A] breach

of the duty of good faith and fair dealing will give rise to a cause of action in tort that is separate

from any cause of action for breach of the underlying insurance contract.”). But the claims are

often “largely interwoven,” and the same evidence is often “admissible on both claims.” Akin, 927

S.W.2d at 630.

The primary question in this case is whether an insured can recover policy benefits as actual

damages caused by an insurer’s statutory violation absent a finding that the insured had a

contractual right to the benefits under the insurance policy. Generally, the answer to this question

is “no,” but the issue is complicated and involves several related questions. In an effort to clarify

these issues, we distill from our decisions five distinct but interrelated rules that govern the

relationship between contractual and extra-contractual claims in the insurance context. First, as a

general rule, an insured cannot recover policy benefits as damages for an insurer’s statutory

violation if the policy does not provide the insured a right to receive those benefits. Second, an

insured who establishes a right to receive benefits under the insurance policy can recover those

benefits as actual damages under the Insurance Code if the insurer’s statutory violation causes the

loss of the benefits. Third, even if the insured cannot establish a present contractual right to policy

benefits, the insured can recover benefits as actual damages under the Insurance Code if the

insurer’s statutory violation caused the insured to lose that contractual right. Fourth, if an insurer’s

statutory violation causes an injury independent of the loss of policy benefits, the insured may

recover damages for that injury even if the policy does not grant the insured a right to benefits.

9 And fifth, an 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.

A. The General Rule

The general rule is that an insured cannot recover policy benefits for an insurer’s statutory

violation if the insured does not have a right to those benefits under the policy. This rule derives

from the fact that the Insurance Code only allows an insured to recover actual damages “caused

by” the insurer’s statutory violation. See TEX. INS. CODE § 541.151; Minn. Life Ins. Co. v. Vasquez,

192 S.W.3d 774, 780 (Tex. 2006). We first announced this rule in Stoker, 903 S.W.2d at 341. The

insurer in Stoker relied on an invalid reason to deny the insureds’ claim for benefits but later

asserted a valid basis for denying the claim. See id. at 339. The insureds sued the insurer for breach

of contract and for bad-faith denial of the claim, seeking only policy benefits as damages. Id. at

339–40. The trial court granted summary judgment for the insurer on the breach-of-contract claim

because the policy did not cover the claim. Id.at 339. The jury, however, found the insurer liable

on the extra-contractual claims, and based on that finding, the trial court awarded policy benefits

as “extra-contractual damages.” Id. at 339–40. The court of appeals affirmed, but we reversed and

rendered judgment for the insurer. We explained that as “a general rule there can be no claim for

bad faith when an insurer has promptly denied a claim that is in fact not covered.” Id. at 341.12

12 We cited the following non-Texas authorities in support of this general rule:

O'Malley v. United States Fidelity & Guar. Co., 776 F.2d 494, 500 (5th Cir. 1985) (noting that no Mississippi case has ever allowed bad faith recovery for the insured without first establishing liability under the policy); Gilbert v. Cong. Life Ins. Co., 646 So. 2d 592, 593 (Ala. 1994) (plaintiff bears the burden of proving a breach of contract by the defendant); Reuter v. State Farm Mut. Auto. 10 Some courts have read Stoker to hold that no claim for any kind of bad-faith conduct can

exist if the policy does not cover the claim. But Stoker involved only a claim for bad-faith denial

of the insureds’ claim for benefits. We clarified this point the following year in Akin: “While Stoker

held that a judgment for the insurer on the coverage claim prohibits recovery premised only on

bad faith denial of a claim, it does not necessarily bar all claims for bad faith.” 927 S.W.2d at 631

(citing Stoker, 903 S.W.2d at 342) (emphases added). Thus, a more accurate statement of the rule

we announced in Stoker is that “there can be no claim for bad faith [denial of an insured’s claim

for policy benefits] when an insurer has promptly denied a claim that is in fact not covered.” Stoker,

903 S.W.2d at 341.

Although Stoker involved only a bad-faith-denial claim, we have since applied its general

rule to other types of extra-contractual violations. In doing so, we have confirmed that the rule is

based on the principle that an insured who sues an insurer for statutory violations can only recover

damages “caused by” those violations. In Progressive County Mutual Insurance Co. v. Boyd, for

Ins. Co., Inc., 469 N.W.2d 250, 253 (Iowa 1991) (“[A] bad faith failure to pay the insured when the insured event occurs . . . may subject the insurer to tort liability”); Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993) (noting that in order to establish a tort action for bad faith the insured must first prove that the insurer was obligated to pay under the policy); Pemberton v. Farmers Ins. Exchange, 109 Nev. 789, 858 P.2d 380, 382 (1993) (“An insurer fails to act in good faith when it refuses ‘without proper cause’ to compensate the insured for a loss covered by the policy.”); Bartlett v. John Hancock Mut. Life Ins. Co., 538 A.2d 997, 1000 (R.I. 1988) (“[T]here can be no cause of action for an insurer’s bad faith refusal to pay a claim until the insured first establishes that the insurer breached its duty under the contract of insurance.”); see also OSTRAGER & NEWMAN, INSURANCE COVERAGE DISPUTES § 12.01 at 503 (7th ed. 1994) (“The determination of whether an insurer acted in bad faith generally requires as a predicate a determination that coverage exists for the loss in question.”); 15A RHODES, COUCH ON INSURANCE LAW 2D § 58:1 at 249 (Rev. ed. 1983) (“As a general rule, there may be no extra-contractual recovery where the insured is not entitled to benefits under the contract of insurance which establishes the duties sought to be sued upon.”).

Stoker, 903 S.W.2d at 341.

11 example, the insured alleged that the insurer breached the policy and violated the Code and its

common-law duty by failing to promptly pay his claim, failing to fairly investigate the claim, and

denying the claim in bad faith. 177 S.W.3d 919, 920, 922 (Tex. 2005) (per curiam). Because these

extra-contractual claims were “predicated on [the] insurance policy and the accident being covered

under the insurance policy,” we held that the trial court’s take-nothing judgment on the contract

claim “negate[d]” the extra-contractual claims. Id. at 920–21. Specifically addressing the statutory

prompt-payment claim, we explained that there “can be no liability [under the Code] if the

insurance claim is not covered by the policy.” Id. at 922. Similarly, in Chrysler Insurance Co. v.

Greenspoint Dodge of Houston, Inc., we quoted Stoker’s general rule and held that, because the

insurer “did not breach the insurance contract, no basis supports” the insured’s recovery of

“punitive and extra-contractual damages.” 297 S.W.3d 248, 253–54 (Tex. 2009) (per curiam). And

in State Farm Lloyds v. Page, we said, “When the issue of coverage is resolved in the insurer’s

favor, extra-contractual claims do not survive,” and there is “no liability under [the Insurance

Code] if there is no coverage under the policy.” 315 S.W.3d 525, 532 (Tex. 2010) (citing Boyd,

177 S.W.3d at 921). Most recently, in JAW the Pointe, L.L.C. v. Lexington Insurance Co., we

relied on Stoker for the proposition that when an insurance policy does not cover the insured’s

claim for benefits, “the insured cannot recover for the insurer’s bad faith failure to effectuate a

prompt and fair settlement of the claim.” 460 S.W.3d 597, 599, 602 (Tex. 2015).

In the present case, the jury found that USAA violated the Code by denying the claim

without conducting a reasonable investigation. See TEX. INS. CODE § 541.060(a)(7) (providing that

an insurer that “refus[es] to pay a claim without conducting a reasonable investigation with respect

12 to the claim” commits an unfair settlement practice). In our early decisions, we mentioned this

type of statutory violation but did not specifically address whether the general rule applies to such

a claim. In Stoker, we expressly stated that the general rule should not “be understood as retreating

from the established principles regarding the duty of an insurer to timely investigate its insureds’

claims.” 903 S.W.2d at 341. But we did not cite any authority for those “established principles.”

Instead, we merely noted, “These circumstances are not present in this case.” Id.13 That same year,

we noted in Twin City that “some acts of bad faith, such as a failure to properly investigate a claim

or an unjustifiable delay in processing a claim, do not necessarily relate to the insurer’s breach of

its contractual duties to pay covered claims, and may give rise to different damages.” 904 S.W.2d

at 666 n.3 (emphases added). The following year, we noted in Akin that the insured alleged that

the insurer violated its statutory duties by failing to “properly investigate” the claim, 927 S.W.2d

at 629, and we explained that the general rule “does not necessarily bar all claims for bad faith,”

id. at 631 (citing Stoker, 903 S.W.2d at 342), but we did not specifically address whether the

general rule applies to an improper-investigation claim.

We did address something akin to an improper-investigation claim, however, in Castañeda.

The insured in that case sued her insurer alleging statutory violations “arising out of the denial of

her claim for benefits under a health insurance policy and the manner in which her claim was

handled.” 988 S.W.2d at 191. But she did not assert a claim for breach of contract or seek a finding

that the policy covered her claim. Id. at 196, 201. Instead, she argued that she was entitled to

13 At least one court of appeals has held that in Stoker we recognized an inadequate-investigation violation as an “exception” to the general rule. See Toonen v. United Servs. Auto Ass’n, 935 S.W.2d 937, 941–42 (Tex. App.— San Antonio 1996, no writ) (citing Stoker, 903 S.W.2d at 341). That holding misconstrues Stoker, as our subsequent decisions demonstrate. 13 recover damages “equivalent to policy benefits” based on the jury’s finding that the insurer

violated the statute by failing to acknowledge communications about the claim and by failing “to

adopt reasonable standards for investigating claims.” Id. at 198 (emphasis added). We found no

evidence that the insurer violated the statute in either manner. Id. at 192. We also explained that,

even if there had been evidence of a violation, a “failure to properly investigate a claim is not a

basis for obtaining policy benefits.” Id. at 198 (citing Stoker, 903 S.W.2d at 341). We ultimately

rendered judgment for the insurer because “no support in the evidence for any of the extra-

contractual claims” existed and because the insured “did not plead and did not obtain a

determination [that the insurer] was liable for breach of the insurance contract.” Id. at 201. We

held similarly in Boyd, 177 S.W.3d at 922. Because the claim there was predicated on the accident

being covered under the insurance policy, when the trial court granted a take-nothing judgment on

the insured’s breach-of-contract claim, the insured’s failure-to-fairly-investigate claim failed as

well. Id. at 920–21; see also In re Allstate Cnty. Mut. Ins. Co., 447 S.W.3d 497, 501 (Tex. App.—

Houston [1st Dist.] 2014, orig. proceeding) (citing Boyd for the proposition that an “insurer

generally cannot be liable for failing to settle or investigate a claim that it has no contractual duty

to pay”).

Here, Menchaca contends that she can recover policy benefits as damages resulting from

USAA’s statutory violation because that claim is independent from her claim for policy breach.

The court of appeals agreed, reasoning that the statute “imposes a duty on an insurer, above and

beyond the duties established by the insurance policy itself, to conduct a reasonable investigation

prior to denying a claim,” and thus “USAA could have fully complied with the contract even if it

14 failed to reasonably investigate Menchaca’s claim.” — S.W.3d —. While we agree with the court’s

premise that USAA could have complied with the policy even if it failed to reasonably investigate

the claim, we reject its conclusion just as we expressly rejected it in Stoker. Although we accepted

the argument’s premise that “a policy claim is independent of a bad faith claim,” we found that the

“asserted conclusion . . . does not necessarily follow,” at least when the claim seeks benefits “not

covered by the policy.” Id. at 340–41.

The reason we reject Menchaca’s independent-claims argument—indeed, the very reason

for the general rule—derives from the fact that the Insurance Code only allows an insured to

recover actual damages “caused by” the insurer’s statutory violation. TEX. INS. CODE § 541.151.

“Actual damages” are the common-law damages the insured sustains “as a result of” the statutory

violation. Kish v. Van Note, 692 S.W.2d 463, 466 (Tex. 1985) (citing Smith v. Baldwin, 611 S.W.2d

611, 617 (Tex. 1980)). If the insurer violates a statutory provision, that violation—at least

generally14—cannot cause damages in the form of policy benefits that the insured has no right to

receive under the policy. We acknowledged this reasoning in Castañeda, noting that the

“concurring Justices in Stoker agreed that the manner in which a claim is investigated must be the

proximate cause of damages before there could be a recovery.” 988 S.W.2d at 198 (citing Stoker,

903 S.W.2d at 345 (Spector, J., concurring)).15 We held that, in the absence of a finding that the

14 We say “generally” here because in some cases the insurer’s statutory violation may cause the policy to not cover the claim when, but for the statutory violation, the policy would cover the claim. See, e.g., JAW the Pointe, 460 S.W.3d at 602. We discuss this situation further below. 15 Justice Spector authored the concurrence in Stoker, joining the Court’s judgment because she agreed that no evidence supported the claim that the insurer’s “bad faith caused damages to the Stokers.” Stoker, 903 S.W.2d at 342 (Spector, J., concurring). Notably, Justice Spector joined Justice Gonzalez’s dissent in Castañeda in which Justice Gonzalez argued that Stoker does not apply when the policy covers the claim. See Castañeda, 988 S.W.2d at 203, 208 (Gonzalez, J., dissenting). 15 insurer had breached the policy, the insured could not recover any damages because none of the

insurer’s alleged statutory violations “was the producing cause of any damage separate and apart

from those that would have resulted from a wrongful denial of the claim.” Id. Because the insured

only sought damages that “flow[ed]” and “stemmed from the denial of benefits,” id. at 198, 199,

she could not recover anything because she “did not plead and did not obtain a determination [that

the insurer] was liable for breach of the insurance contract.” Id. at 201.16

Relying on these decisions, USAA contends that the general rule applies here and

Menchaca cannot recover policy benefits based on a statutory violation because the jury failed to

find that USAA “breached” the insurance contract. In response, Menchaca argues that she can

avoid the general rule by obtaining a finding that the policy “covers” her losses, and she did not

have to obtain a finding that USAA “breached” the policy to recover under the statute. Our

precedent is confusing on this point because we have actually used both phrases to describe the

general rule. See, e.g., JAW the Pointe, 460 S.W.3d at 599 (holding that insured could not recover

benefits as statutory damages because “the policy did not cover the insured’s losses”) (emphasis

added); Page, 315 S.W.3d at 532 (“There can be no liability under [the Insurance Code] if there is

no coverage under the policy.”) (emphasis added); Chrysler, 297 S.W.3d at 254 (holding that

insured could not recover extra-contractual damages because the insurer “did not breach the

16 Although we did not explain the reason for the general rule in Stoker, we alluded to it by acknowledging “the possibility that in denying the claim, the insurer may commit some act, so extreme, that would cause injury independent of the policy claim.” Stoker, 903 S.W.2d at 341 (emphasis added). We made similar allusions to the causation requirement in Boyd, 177 S.W.3d at 920–21 (holding that insured could not recover benefits based on the insurer’s improper investigation when the policy did not cover the claim for benefits because the improper- investigation claim was “predicated” on policy coverage), and in Twin City, 904 S.W.2d at 667 n.3 (noting that some bad-faith acts may “give rise” to damages other than policy benefits).

16 insurance contract”) (emphasis added); Boyd, 177 S.W.3d at 920–21 (concluding that a take-

nothing judgment on a breach-of-contract claim negated recovery of benefits as statutory

damages); Castañeda, 988 S.W.2d at 201 (holding that insured could not recover statutory

damages “equivalent to policy benefits” because she did not plead or establish that the insurer

“was liable for breach of the insurance contract”) (emphasis added); Stoker, 903 S.W.2d at 341

(“[T]here can be no claim for bad faith when an insurer has promptly denied a claim that is in fact

not covered.”) (emphasis added).

In one sense, no relevant distinction exists between “breach” and “coverage” in this context

because no breach can occur unless coverage exists, and if there is coverage, there is necessarily a

breach if the insurer fails to pay the amount covered. If the policy does not cover the insured’s

loss, the insurer does not breach the policy by failing to pay benefits for that loss, because the

insured is not entitled to those benefits. Conversely, if the policy does cover the loss, the insurer

necessarily breaches the policy if it fails to pay benefits for the loss because the insured is entitled

to those benefits. In another sense, however, an important distinction does exist because USAA

contends that Menchaca could not recover policy benefits unless she prevailed on her breach-of-

contract claim. According to USAA, in other words, an insured can never recover policy benefits

as damages for a statutory violation.

We disagree. Although our prior decisions refer interchangeably to both “breach” and

“coverage,” our focus in those cases was on whether the insured was entitled to benefits under the

policy, because an insurer’s statutory violation cannot “cause” the insured to suffer the loss of

benefits unless the insured was entitled to those benefits. Thus, although we have referred to both

17 “breach” and “coverage,” what matters for purposes of causation under the statute is whether the

insured was entitled to receive benefits under the policy. While an insured cannot recover policy

benefits for a statutory violation unless the jury finds that the insured had a right to the benefits

under the policy, the insured does not also have to establish that the insurer breached the policy

by refusing to pay those benefits. As we explain further in the following section, if the jury finds

that the policy entitles the insured to receive the benefits and that the insurer’s statutory violation

caused the insured to not receive those benefits, the insured can recover the benefits as “actual

damages . . . caused by” the statutory violation. See TEX. INS. CODE § 541.151.

Nevertheless, an insurer’s obligation to pay policy benefits and the insured’s right to

receive them derive solely from the insurance policy’s terms: “If the loss is covered, then the

insurer is obligated to pay the claim according to the terms of the insurance contract.” Moriel, 879

S.W.2d at 17. Because an insurer’s statutory violation permits an insured to receive only those

“actual damages” that are “caused by” the violation, we clarify and affirm the general rule that an

insured cannot recover policy benefits as actual damages for an insurer’s statutory violation if the

insured has no right to those benefits under the policy.

B. The Entitled-to-Benefits Rule

The second rule from our precedent is 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 violation causes the loss of the benefits. This rule, a logical corollary to

the general rule, is what we recognized in Vail. The insureds in Vail sued their insurer for common-

law bad faith and statutory violations (but not for breach of contract), alleging a “bad faith failure

18 to pay the claim” and seeking “the full amount” of policy benefits plus statutory damages. 754

S.W.2d at 130. The jury found that the insurer violated the statute by failing to “attempt[ ] in good

faith to effectuate a prompt, fair, and equitable settlement” when “liability had become reasonably

clear,” and breached its common-law duty of good faith and fair dealing by failing “to exercise

good faith in the investigation and processing of the claim.” Id. at 134. Based on these findings,

the trial court awarded benefits in the amount of the “full policy limit” plus treble that amount,

attorney’s fees, and prejudgment interest. Id. at 131.

The insurer argued that the insureds could not recover policy benefits as damages for

statutory violations because “the amount due under the policy solely represents damages for breach

of contract and does not constitute actual damages in relation to a claim of unfair claims settlement

practices.” Id. at 136. We rejected that argument and held that “an insurer’s unfair refusal to pay

the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits

wrongfully withheld.” Id. We explained that the insureds “suffered a loss . . . for which they were

entitled to make a claim under the insurance policy,” and that loss was “transformed into a legal

damage” when the insurer “wrongfully denied the claim.” Id. “That damage,” we held, “is, at

minimum, the amount of policy proceeds wrongfully withheld by” the insurer. Id. Because the

Insurance Code provides that the statutory remedies are cumulative of other remedies, we

concluded that the insureds could elect to recover the benefits under the statute even though they

also could have asserted a breach-of-contract claim. Id.

USAA contends, and some Texas courts have concluded, that we later rejected the Vail

rule in Castañeda and Stoker, and thus an insured can never recover policy benefits as actual

19 damages for statutory or common-law bad-faith violations. See, e.g., Mai v. Farmers Tex. Cnty.

Mut. Ins. Co., 2009 WL 1311848, at *6 (Tex. App.—Houston [14th Dist.] May 7, 2009, pet.

denied) (mem. op.) (“This position, that expected policy benefits can equate to bad faith damages,

has been firmly rejected by the Texas Supreme Court.”). The United States Court of Appeals for

the Fifth Circuit reached the same conclusion in Parkans International, LLC v. Zurich Insurance

Co., holding that, in light of Castañeda, there “can be no recovery for extra-contractual damages

for mishandling claims unless the complained of actions or omissions caused injury independent

of those that would have resulted from a wrongful denial of policy benefits.” 299 F.3d 514, 519

(5th Cir. 2002). The Fifth Circuit later relied on Parkans to reject an insured’s argument that “it

did not need to prove a separate injury in order to maintain its extra-contractual claims” because

the insurer’s “denial of insurance proceeds, standing alone, entitled it to recover on its extra-

contractual claims.” Great Am. Ins. Co. v. AFS/IBEX Fin. Servs., Inc., 612 F.3d 800, 808 n.1 (5th

Cir. 2010).17

We did not reject the Vail rule in Stoker or in Castañeda. While we could have made the

point more clearly, the distinction between the cases is that the parties in Vail did not dispute the

insured’s entitlement to the policy benefits, and the only issue was whether the insured could

recover those benefits as statutory damages. Vail, 754 S.W.2d at 136. The rule we announced in

17 At least one federal district court expressly disagreed with Great American’s reading of Castañeda, but it ultimately concluded that it was compelled to follow the Fifth Circuit’s precedent. See In re Oil Spill by the Oil Rig Deepwater Horizon, 2014 WL 5524268, at *15 (E.D. La. Oct. 31, 2014) (disagreeing with insurer’s argument that the insured could not recover policy benefits as actual damages under the statute because we “considered and rejected” that argument in Vail, but nevertheless concluding that it was required to follow Great American), aff’d in part, question certified sub nom, Deepwater Horizon, 807 F.3d at 689.

20 Vail was premised on the fact that the policy undisputedly covered the loss in that case, and the

insurer therefore “wrongfully denied” a “valid claim.” Id. at 136–37 (emphases added).18 If an

insurer’s “wrongful” denial of a “valid” claim for benefits results from or constitutes a statutory

violation, the resulting damages will necessarily include “at least the amount of the policy benefits

wrongfully withheld.” Id. at 136. We confirmed this reading of Vail and reaffirmed the general

rule in Twin City, 904 S.W.2d at 666. There, we explained that “Vail was only concerned with the

insurer’s argument that policy benefits improperly withheld were not ‘actual damages in relation

to a claim of unfair claims settlement practices.’” Id. (emphasis added) (quoting Vail, 754 S.W.2d

at 136). We further explained that the Court rejected the insurer’s argument in Vail because “policy

benefits wrongfully withheld were indeed actual damages” under the statute. Id. (emphasis added).

By contrast, in Castañeda, the insured did not establish and the insurer did not concede

that the insured had a right to benefits under the policy. To the contrary, the insured “never sought

and did not receive any contractual relief,” Castañeda, 988 S.W.2d at 196, and never even alleged

that the insurer “was liable for breach of the insurance contract,” id. at 201. Instead, she sought

only to recover damages “equivalent to policy benefits” based solely on her statutory claims that

18 Although four justices dissented in Vail in two separate opinions, none of them objected to the Court’s opinion or judgment on the basis that the insureds failed to plead or obtain a finding that the insureds were entitled to receive benefits under the policy. Although the Court’s majority opinion did not expressly explain the circumstances, it noted that the insureds “pleaded and proved” the amount of the policy’s coverage and “offered evidence that [the insurer] had wrongfully denied the claim, resulting in a failure to pay [the policy benefits] when due.” Vail, 754 S.W.2d at 137. The majority thus concluded that the insureds sustained the policy limits “as actual damages as a result of [the insurer’s] unfair claims settlement practices.” Id. JUSTICE GONZALEZ provided more clarity in his dissent, noting that the insurer “admits that it owes [the insured] the full amount of the policy” and thus “the sole issue on appeal is whether [the insured] is entitled to treble damages under the [statute].” Id. at 138 n.1 (GONZALEZ, J., dissenting) (emphasis added). Apparently, the Court’s majority did not insist upon a jury finding of coverage or breach because the insurer admitted that the insured was entitled to the benefits. Vail should not be read, however, as suggesting that an insured can recover benefits for a statutory violation when the insured fails to establish and the insurer does not concede that the insured has a contractual right to the benefits. 21 the insurer failed to acknowledge communications about her claim and failed to “adopt reasonable

standards for investigating claims.” Id. at 198 (emphasis added). We expressly refused to provide

any opinion on “whether there was contractual coverage.” Id. at 196. We first addressed whether

any evidence existed that the insurer violated the statute or its common-law duties, and in deciding

that issue we concluded that, even assuming that there was coverage, the mere existence of

coverage would not prove that the insurer violated the statute or its common-law duties by denying

the claim. Id. at 196–97. We made no such assumption, however, when we later addressed the

insured’s separate argument regarding “the damages that might be recoverable if an insurer failed

to adequately investigate a claim.” Id. at 198. On that issue, we held that an insurer’s “failure to

properly investigate a claim is not a basis for obtaining policy benefits,” but we did not assume

that coverage existed when deciding that separate issue. Id. Instead, we relied on the fact that the

insured “did not plead and did not obtain a determination [that the insurer] was liable for breach

of the insurance contract.” Id. at 198, 201.

In short, Stoker and Castañeda stand for the general rule that an insured cannot recover

policy benefits as damages for an insurer’s extra-contractual violation if the policy does not

provide the insured a right to those benefits. Vail announced a corollary rule: an insured who

establishes a right to benefits under the policy can recover those benefits as actual damages

resulting from a statutory violation. We clarify and affirm both of these rules today.

C. The Benefits-Lost Rule

A third rule that our precedent recognizes is the rule that an insured can recover benefits as

actual damages under the Insurance Code even if the insured has no right to those benefits under

22 the policy, if the insurer’s conduct caused the insured to lose that contractual right. We have

recognized this principle in the context of claims alleging that an insurer misrepresented a policy’s

coverage, waived its right to deny coverage or is estopped from doing so, or committed a violation

that caused the insured to lose a contractual right to benefits that it otherwise would have had. In

each of these contexts, the insured can recover the benefits even though it has no contractual right

to recover them because the benefits are actual damages “caused by” the insurer’s statutory

violation.

In the first context, we have recognized that an insurer that violates the statute by

misrepresenting that its policy provides coverage that it does not in fact provide can be liable under

the statute for such benefits if the insured is “adversely affected” or injured by its reliance on the

misrepresentation. See Royal Globe Ins. Co. v. Bar Consultants, Inc., 577 S.W.2d 688, 694 (Tex.

1979).19 Although the policy does not give the insured a contractual right to receive the benefits,

the insurer’s misrepresentation of the policy’s coverage constitutes a statutory violation that causes

actual damages in the amount of the benefits that the insured reasonably believed she was entitled

to receive. Id. When, for example, a health insurer’s agent represented that a policy “offered full

coverage without qualification” for preexisting medical conditions, and the insured reasonably

relied on that representation, the insured could recover the full coverage even though the policy

19 Royal Globe, which was also a DTPA case, preceded the 1979 amendments to the DTPA that changed the causation standard from “adversely affected” to “producing cause.” See Metro Allied Ins. Agency, Inc. v. Lin, 304 S.W.3d 830, 835 (Tex. 2009) (explaining effect of the 1979 amendments).

23 actually limited such coverage to a specific maximum amount. Kennedy v. Sale, 689 S.W.2d 890,

891–92 (Tex. 1985); see also Tapatio Springs Builders Inc. v. Md. Cas. Ins. Co., 82 F. Supp. 2d

633, 647 (W.D. Tex. 1999) (“A misrepresentation claim is independent, and may exist in the

absence of coverage. To allege a misrepresentation claim under the DTPA, a plaintiff must plead

a misrepresentation that caused actual damages.”) (citing TEX. BUS. & COM. CODE § 17.5(a);

Castañeda, 988 S.W.2d at 199–200); In re Allstate Cnty. Mut. Ins. Co., 447 S.W.3d 497, 502 (Tex.

App.—Houston [1st Dist.] 2014, orig. proceeding) (“[M]isrepresentation claims . . . are not

dependent upon a determination that [the insurer] has a contractual duty to pay . . . benefits to the

[insureds], and will not be rendered moot if [the insurer] prevails on the breach of contract claim.”)

(citing TEX. BUS. & COM. CODE § 17.46(b)(5), (b)(12); TEX. INS. CODE § 541.061(3)–(5)).

The second context in which the benefits-lost rule might apply involves claims based on

waiver and estoppel. We have explained that waiver and estoppel cannot be used to re-write a

policy so that it provides coverage it did not originally provide. Ulico, 262 S.W.3d at 775. But if

the insurer’s statutory violations prejudice the insured, the insurer may be estopped “from denying

benefits that would be payable under its policy as if the risk had been covered.” Id. Under such

circumstances, the insured may recover “any damages it sustains because of the insurer’s actions,”

even though the policy does not cover the loss. Id. at 787.

Finally, the benefits-lost rule may apply when the insurer’s statutory violation actually

caused the policy not to cover losses that it otherwise would have covered. See, e.g., JAW the

Pointe, 460 S.W.3d at 602. The insured in JAW the Pointe sought policy benefits to cover its costs

to demolish and rebuild an apartment complex that sustained significant damage from Hurricane

24 Ike. See id. at 599. The primary insurance policy covered three hundred otherwise unrelated

apartment complexes but limited the total coverage to $25 million per occurrence. Id. When the

insurer denied the insured’s claim for some of the losses, the insured filed suit asserting claims for

both breach of contract and statutory violations. Id. at 601. As the parties continued efforts to

resolve their dispute, the insurer continued paying claims filed by the other covered apartment

complexes until the insurer reached the policy’s $25 million limit. Id. The insurer then filed for

summary judgment on the insured’s contract claim, arguing that it no longer had a contractual duty

to cover the losses because it had paid the policy limits. Id. at 600. The insured did not oppose the

motion and the trial court granted it, leaving only the statutory claims for trial. Id. A jury found

that the insurer had violated the statute, and based on the statutory violations the trial court awarded

the insured both actual damages in the form of the policy benefits and additional statutory damages

based on the insurer’s “bad faith” statutory violations. Id. at 601–02.

The insurer appealed, arguing that the insured could not recover policy benefits or statutory

damages because the policy did not cover the insured’s losses. See id. at 602. But instead of relying

on the policy limits to defeat coverage, the insurer argued that the policy never covered the losses

even before the insurer paid out the limits because a policy exclusion applied and negated any

coverage. See id. We acknowledged that as “a general rule there can be no claim for bad faith when

an insurer has promptly denied a claim that is in fact not covered.” Id. (quoting Stoker, 903 S.W.2d

at 341) (internal quotation marks omitted). But we also noted that the insured argued that “the

policy covered [the insured’s losses] and [the insurer] should have paid those costs before it made

other payments that exhausted the policy limits.” Id. In other words, the insured argued that,

25 although it could no longer prevail on its breach-of-contract claim because the insurer had paid out

its policy limits, the insurer’s statutory violations caused the insured to lose its contractual right to

the policy benefits by delaying the payments until after the limits had been reached. We accepted

this argument, but ultimately concluded that the insured was never entitled to the policy benefits

because the exclusion negated any coverage under the policy. Because the policy “excluded

coverage for [the insured’s] losses, [the insured] cannot recover against [the insurer] on its

statutory bad-faith claims.” Id. at 610. Put simply, an insurer that commits a statutory violation

that eliminates or reduces its contractual obligations cannot then avail itself of the general rule.

D. The Independent-Injury Rule

The fourth rule from our precedent derives from the fact that an insurer’s extra-contractual

liability is “distinct” from its liability for benefits under the insurance policy. See Aranda v. Ins.

Co. of N. Am., 748 S.W.2d 210, 214 (Tex. 1988), overruled on other grounds by Ruttiger, 381

S.W.3d at 441. In Stoker, after we announced the general rule that “there can be no claim for bad

faith when an insurer has promptly denied a claim that is in fact not covered,” we explained that

we were not excluding “the possibility that in denying the claim, the insurer may commit some

act, so extreme, that would cause injury independent of the policy claim.” 903 S.W.2d at 341

(citing Aranda, 748 S.W.2d at 214).

There are two aspects to this independent-injury rule. The first is that, if an insurer’s

statutory violation causes an injury independent of the insured’s right to recover policy benefits,

the insured may recover damages for that injury even if the policy does not entitle the insured to

receive benefits. Id. We recognized this in Twin City, explaining that some extra-contractual claims

26 may not “relate to the insurer’s breach of contractual duties to pay covered claims” and may thus

“give rise to different damages.” 904 S.W.2d at 666 n.3. If such damages result from an

independent injury “caused by” the insurer’s statutory violation, the insured can recover those

damages, just as insureds have always been able to recover “compensatory damages for the tort of

bad faith” under the common law. Moriel, 879 S.W.2d at 17. Thus, 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.” Twin City, 904 S.W.2d at 666 (identifying mental anguish

damages as an example). We reaffirmed this aspect of the independent-injury rule in Castañeda,

recognizing that “there might be liability for damage to the insured other than policy benefits or

damages flowing from the denial of the claim if the insured mishandled a claim.” 988 S.W.2d at

198. We concluded that the insured could not recover anything in that case, however, because

“none of the [insurer’s] actions or inactions . . . was the producing cause of any damage separate

and apart from those that would have resulted from a wrongful denial of the claim.” Id.

This aspect of the independent-injury rule applies, however, only if the damages are truly

independent of the insured’s right to receive policy benefits. It does not apply if the insured’s

statutory or extra-contractual claims “are predicated on [the loss] being covered under the

insurance policy,” Boyd, 177 S.W.3d at 920, or if the damages “flow” or “stem” from the denial

of the claim for policy benefits, see Castañeda, 988 S.W.2d at 198–99. When an insured seeks to

recover damages that “are predicated on,” “flow from,” or “stem from” policy benefits, the general

rule applies and precludes recovery unless the policy entitles the insured to those benefits. See

Boyd, 177 S.W.3d at 920–22 (concluding that insured’s common-law conversion claim, common-

27 law bad-faith claim, and statutory claims were all “negated” because policy did not cover

underlying losses and insured did “not allege that he suffered any damages unrelated to and

independent of the policy claim”); Castañeda, 988 S.W.2d at 199 (holding that insured could not

recover damages for loss of credit reputation because any such loss “stemmed from the denial of

benefits” that were not owed under the policy).

The second aspect of the independent-injury rule is that an insurer’s statutory violation

does not permit the insured to recover any damages beyond policy benefits unless the violation

causes an injury that is independent from the loss of the benefits. Thus, we held in Twin City that

an insured who prevails on a statutory claim cannot recover punitive damages for bad-faith conduct

in the absence of independent actual damages arising from that conduct. 904 S.W.2d at 666; see

also Powell Elec. Sys., Inc. v. Nat’l Union Fire Ins. Co., 2011 WL 3813278, at *9 (S.D. Tex. Aug.

29, 2011) (granting summary judgment for the insured on its breach-of-contract claim but for the

insurer on common-law and statutory bad-faith claims because the insured “failed to allege damage

independent of the damages arising from the underlying breach of the insurance contract”).

Our reference in Stoker to “the possibility” that a statutory violation could cause an

independent injury suggested that a successful independent-injury claim would be rare, and we in

fact have yet to encounter one. See, e.g., Mid-Continent Cas. Co. v. Eland Energy, Inc., 709 F.3d

515, 521–22 (5th Cir. 2013) (“The Stoker language has frequently been discussed, but in seventeen

years since the decision appeared, no Texas court has yet held that recovery is available for an

insurer’s extreme act, causing injury independent of the policy claim . . . .”). This is likely because

the Insurance Code offers procedural protections against misconduct likely to lead to an improper

28 denial of benefits and little else. See, e.g., TEX. INS. CODE § 541.060 (prohibiting an insurer from

“requiring a claimant as a condition of settling a claim to produce the claimant’s federal income

tax returns”). We have further limited the natural range of injury by insisting that an “independent

injury” may not “flow” or “stem” from denial of policy benefits. See Castañeda, 988 S.W.2d at

198. Today, although we reiterate our statement in Stoker that such a claim could exist, we have

no occasion to speculate what would constitute a recoverable independent injury.

E. The No-Recovery Rule

The fifth and final rule is simply the natural corollary to the first four rules: An insured

cannot recover any damages based on an insurer’s statutory violation unless the insured establishes

a right to receive benefits under the policy or an injury independent of a right to benefits.

Castañeda, 988 S.W.2d at 198; see also Lundstrom v. United Servs. Auto. Ass’n–CIC, 192 S.W.3d

78, 96 (Tex. App.—Houston [14th Dist.] 2006, pet. denied) (rendering judgment for insurer

because policy did not cover claim and insureds “have not alleged any act so extreme as to cause

an injury independent of [the insurer’s] denial of their policy claim”); Bailey v. Progressive Cnty.

Mut. Ins. Co., 2004 WL 1193917, at *1 (Tex. App.—Dallas June 1, 2004, no pet.) (mem. op., not

designated for publication) (rendering judgment against insureds because policy did not cover

claim and insureds demonstrated no “independent injury arising from” statutory violations); see

also Alaniz v. Sirius Int’l Ins. Corp., 626 F. App’x 73, 79 (5th Cir. 2015) (per curiam) (citing Boyd,

177 S.W.3d at 922) (affirming summary judgment for insurer on all claims because no coverage

or breach and insured put forth no evidence of “extreme conduct or of damages suffered

independent of those that would have resulted from an alleged wrongful denial of his claim”).

29 F. Summary

We clarify today that an insured cannot recover policy benefits as damages for an insurer’s

statutory violation if the policy does not provide the insured a right to receive those benefits. An

insured who establishes a right to receive benefits under the policy can recover those benefits as

actual damages under the Insurance Code if the insurer’s statutory violation causes the loss of the

benefits. And an insured can recover benefits as actual damages under the Insurance Code even if

the insured has no contractual right to those benefits if the insurer’s conduct caused the insured to

lose that right. If an insurer’s statutory violation causes an injury independent of the insured’s right

to recover policy benefits, the insured may recover damages for that injury even if the insured is

not entitled to receive benefits under the policy. But if the policy does entitle the insured to

benefits, the insurer’s statutory violation does not permit the insured to recover any actual damages

beyond those policy benefits unless the violation causes an injury that is independent from the loss

of the benefits. Finally, an 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.

III. MENCHACA’S CLAIMS AGAINST USAA

Having clarified the governing rules, we now turn to the case before us. As explained

above, the jury in this case (1) failed to find that USAA failed to comply with its obligations under

the insurance policy; (2) found that USAA violated the Insurance Code by failing to reasonably

investigate Menchaca’s claim for policy benefits; and (3) found that USAA’s statutory violation

resulted in damages of $11,350, representing the amount of policy benefits USAA “should have

30 paid” Menchaca. Ever since the jury returned its verdict, the parties have disputed the effect of

these findings. Relying on the jury’s answer to Question 1 and on its misunderstanding of the

general rule, USAA contends that Menchaca cannot recover any policy benefits because the jury

failed to find that USAA “breached” its obligations under the policy. Relying on the jury’s answers

to Questions 2 and 3 and on her misunderstanding of Vail’s holding that damages under the

Insurance Code were “at minimum, the amount of policy proceeds wrongfully withheld,” 754

S.W.2d at 136, Menchaca contends that she can recover the policy benefits because the jury found

that USAA violated the statute and the violation caused damages in the form of policy benefits

USAA “should have paid” to Menchaca.

The trial court resolved the parties’ dispute by disregarding the jury’s answer to Question

1, and USAA argues that the court erred by doing so. We agree. As a result, we are left to decide

the effect of the jury’s answers based on arguments the parties have made without the benefit of

the clarifications we have provided today. Under these circumstances, and because we have found

it necessary to clarify the confusion resulting from our decisions, we conclude that it is proper to

remand the case for a new trial in the interest of justice.

A. Disregarding Question 1

After the jury returned its verdict, both parties accepted it without objection, and the trial

court dismissed the jury. Both parties then filed motions for judgment in their favor based on the

jury’s verdict. Relying primarily on Stoker and Castañeda, USAA argued that Menchaca could

not recover any damages based on the jury’s finding of a statutory violation because the jury failed

to find that USAA had “breached” the policy in answer to Question 1. Relying primarily on Vail

31 and on the jury’s answers to Questions 2 and 3, Menchaca argued that she could recover the amount

of policy benefits the jury found because “the jury found there was coverage,” even if she failed

to find that USAA breached the contract. Although neither party argued that the jury’s answers

created a conflict, the trial court believed they did. Instead of considering how to address and

resolve the conflict, however, the court decided to disregard Question 1 because it found the

question to be “poorly worded” and “incomprehensible.” Specifically, the court explained that

Question 1:

says, “Breach of contract,” but it doesn’t say what kind of breach.[20] It doesn’t even explain breach of contract. It doesn’t even give a definition for breach of contract. There’s all kinds of other things that should have been put in there about what’s material breach, definition of material breach. The question fails altogether. It shouldn’t have been submitted in the first place. If you remember correctly, I didn’t want that question submitted. But it was insisted upon by the plaintiffs, so they’ve got to reap what they sow. But I think that I can easily ignore question number one as being incomprehensible to a layman and that it has no effect. I can go with what I wanted to go with in the first place which was question number two, damage question, then attorney’s fees. That’s what I’m going to do. I’m going to ignore question number one entirely because I think it was poorly worded.

The court of appeals affirmed the trial court’s decision to disregard Question 1, but for

different reasons. First, the court concluded that it was impossible to know why the jury answered

“No” to the question. See — S.W.3d at —. In the court’s view, the jury could have answered “No”

because it mistakenly believed that USAA could only “fail to comply with the terms of the

insurance policy” if it failed to pay the amount that USAA subjectively believed it had to pay. See

id. Second, it concluded that the jury’s “No” answer to Question 1 did not “definitively establish

20 We note that in fact Question 1 did not say “breach of contract” or ask whether there was a “breach of contract,” and neither did any other question. Instead, Question 1 asked whether USAA “failed to comply” with the policy. 32 that there was no coverage,” because USAA agreed that the policy provided coverage for

Menchaca’s losses and instead only contended that the amount of the losses did not exceed the

policy’s deductible. See id. Finally, the court concluded that the jury’s finding in answer to

Question 2 that USAA violated the statute rendered its answer to Question 1 immaterial because

Question 3 “instructed the jury to award the same damages regardless of which theory of liability

was adopted.” See id.

We conclude that the trial court erred by disregarding the jury’s answer to Question 1. “A

trial court may disregard a jury finding only if it is unsupported by evidence . . . or if the issue is

immaterial.” Spencer v. Eagle Star Ins. Co. of Am., 876 S.W.2d 154, 157 (Tex. 1994) (citing C. &

R. Transp., Inc. v. Campbell, 406 S.W.2d 191, 194 (Tex. 1966)). Contrary to the court of appeals’

conclusion, the fact that the court cannot determine the reasons for a jury’s answer does not permit

the court to disregard that answer. Here, the jury’s answer to Question 1 was neither unsupported

by the evidence nor immaterial.

First, in light of USAA’s evidence that Menchaca’s damages were less than the amount of

her deductible, at least some evidence supported the jury’s finding that USAA did not fail to

comply with its obligations under the policy. Although USAA did not dispute that the policy

provided “coverage” for some of Menchaca’s damages, it provided evidence that the amount of

her loss was less than the policy’s deductible, and that evidence supports the jury’s failure to find

that USAA “failed to comply” with its obligations under the policy.21

21 We do not agree with the court of appeals’ reliance on the fact that USAA conceded that the policy “covered” some of Menchaca’s losses. While USAA did in fact concede that point, it contested Menchaca’s claim that her covered losses exceeded the amount of her deductible. By contending that Menchaca’s covered losses did not 33 Second, Question 1 was not immaterial. A jury finding is immaterial when the question

“should not have been submitted, or when it was properly submitted but has been rendered

immaterial by other findings.” Spencer, 876 S.W.2d at 157 (citing C. & R. Transp., 406 S.W.2d at

194). Contrary to the trial court’s conclusion, the fact that a question is defective does not render

the jury’s answer immaterial. See id. (concluding that, “while [a question] was defective, it was

not immaterial.”). Question 1 was material because Menchaca sued USAA for breach of the

insurance policy as well as for statutory violations, and she sought to recover on either claim. The

jury’s answers to Questions 2 and 3 did not render its “No” answer to Question 1 immaterial

because that answer was necessary to resolve Menchaca’s breach-of-contract claim. We therefore

conclude that the court of appeals erred by affirming the trial court’s decision to disregard the

jury’s answer to Question 1.

B. Reversal and Remand in the Interest of Justice

Having concluded that the trial court and court of appeals erred in disregarding the jury’s

answer to Question 1, we will reverse the judgment in Menchaca’s favor. In the interest of justice,

however, we may “remand the case to the trial court even if a rendition of judgment is otherwise

appropriate.” TEX. R. APP. P. 60.3. Such a remand is particularly appropriate when it appears that

one or more parties “proceeded under the wrong legal theory,” Boyles v. Kerr, 855 S.W.2d 593,

603 (Tex. 1993), especially when “the applicable law has . . . evolved between the time of trial and

the disposition of the appeal.” Natural Gas Pipeline Co. of Am. v. Justiss, 397 S.W.3d 150, 162

(Tex. 2012); see also Hamrick v. Ward, 446 S.W.3d 377, 385 (Tex. 2014) (remanding in the

exceed the amount of her deductible, USAA disputed that the policy “covered” the benefits for which she sued because the policy expressly provided that USAA would “cover only that part of the loss over the deductible stated.” 34 interest of justice “in light of our clarification of the law”); Moriel, 879 S.W.2d at 26 (same, in

light of our “substantial clarification”). In light of the parties’ obvious and understandable

confusion over our relevant precedent and the effect of that confusion on their arguments in this

case, we conclude that a remand is necessary here in the interest of justice.

Specifically, USAA has steadfastly maintained that Menchaca cannot recover policy

benefits for a statutory violation unless she also obtains a finding that USAA “breached” the

insurance policy or that USAA’s statutory violation caused an injury independent of her right to

benefits. At trial, USAA objected to the charge’s failure to condition Question 2 on a “Yes” finding

to Question 1 and objected to the submission of Question 3 on the ground that “Texas courts have

held that extra[-]contractual damages need to be independent from policy damages.” After the jury

returned its verdict, USAA argued that it should prevail because “the jury found ‘NO’ breach of

contract” and awarded only policy benefits “for repairs to the property which Plaintiff and her

experts testified were proximately caused by Hurricane Ike.” After the trial court entered its

judgment, USAA argued in its motion for new trial that Menchaca cannot recover in the absence

of a finding of breach because she did not seek damages “separate and apart from those sought

under the breach of contract theory.” Although we have clarified today that Menchaca did not have

to prevail on her breach-of-contract claim to recover policy benefits for a statutory violation, the

confusing nature of our precedent precludes us from faulting USAA for the position it has

maintained throughout this litigation.

Meanwhile, Menchaca has consistently argued that she can recover, even in the absence of

a finding of “breach,” based on the jury’s findings in answer to Questions 2 and 3 that USAA

35 violated the statute and that the violation “caused” Menchaca to incur damages in the form of

policy benefits that USAA “should have paid.” In support of its motion for judgment on the verdict,

Menchaca argued that through these answers “the jury found there was coverage,” and that finding

supported the judgment even though the jury failed to find a “material breach.” Before us,

Menchaca argues that the jury “did not find that [she] suffered no covered losses or that USAA

paid for all Menchaca’s covered losses,” but in fact “found the contrary” in response to Question

3, “finding that USAA failed to pay $11,350 it should have paid (and would have paid but for its

unreasonable investigation) in accordance with the policy.” As with USAA’s arguments, we

conclude that the confusing nature of our precedent precludes us from faulting Menchaca for

asserting throughout this litigation that she did not have to prove breach.

In their briefing to this Court, the parties make additional arguments regarding such issues

as whether USAA adequately objected to the jury charge; whether the jury’s answer to Question

1 established that Menchaca was not entitled to any benefits under the policy; whether the answer

to Question 2 established that USAA breached the policy; whether the answer to Question 3

established that the policy entitled Menchaca to receive $11,350 in benefits; whether the jury’s

answers irreconcilably conflict; and if so, whether and how we can resolve that conflict. We

conclude that the parties’ confusion about our precedent has affected these arguments as well, to

such an extent that justice requires that we remand the case for a new trial without addressing

them.

36 IV. CONCLUSION

The trial court erred by disregarding the jury’s answer to Question 1, and the court of

appeals erred by affirming the trial court’s judgment. In light of the confusion that our precedent

caused in the litigation and appeal of this case, we reverse the court of appeals’ judgment and

remand this case in the interest of justice for a new trial consistent with the rules we have clarified

today.

_____________________ Jeffrey S. Boyd Justice

Opinion delivered: April 7, 2017