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by Alexander Masotto

On October 17, 2024, Judge Andrew S. Hanen in the United States District Court for the Southern District of Texas, Houston Division properly held that: (1) the Benefits-Lost rule does not apply where the insured did not allege “lost contractual rights” due to statutory violation; and (2) the insured’s out-of-pocket living expenses was not an “injury independent” from the loss of policy benefits.

In 2018, the Texas Supreme Court in USAA Texas Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018) identified five interrelated rules that govern the relationship between contractual and extracontractual claims under Chapter 541 of the Texas Insurance Code. The five rules are:

(1)  The 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.

(2)  The Entitled to Benefits Rule: 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 benefits.

(3)  The Benefits-Lost Rule: Even if the insured cannot establish a present contractual right to policy benefits, the insured can recover benefits as actual damages under the Texas Insurance Code if the insurer’s statutory violation caused the insured to lose that contractual right.

(4) The Independent Injury Rule: 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.

(5) The No-Recovery Rule: 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 an alleged right to benefits.

In Dijkman v. AmGuard Insurance Company, No. 4:23-cv-01430, 2024 WL 4520130, a dispute arose relating to a frozen pipe burst claim to the insured’s home due to the Texas freeze in February 2021. The Insurer’s adjuster inspected the property and determined that the home was uninhabitable due to the extent of the damage.

Approximately one month after the loss, the insurer began issuing Additional Living Expenses (“ALE”) payments; however, did not issue Coverage A dwelling payments until awhile after. Because of the insurer’s purported payment delay, the insured and her family lived in a hotel for over one year. Eventually, the insured’s ALE limits exhausted, leading to the insured to pay out-of-pocket expenses for her living arrangements. After receiving additional dwelling payments, the insured made repairs to her home and moved back into her residence.

Although the insured agreed with the amounts paid by the insurer, the insured proceeded to file suit due to: (1) the insurer’s delay in payment under the policy’s terms and conditions; and (2) additional damages based on the insured’s out-of-pocket hotel costs. Here, the insured alleged that the insurer breached the insurance contract, violated chapters 541 and 542 of the Texas Insurance Code, and breached the duty of good faith and fair dealing.

The insurer filed a motion for partial summary judgment arguing that the insured’s breach of contract, Texas Insurance Code, and common law bad faith claims were precluded because the insurer made full payments under the policy. Additionally, the insurer asserted that because the insured cannot satisfy the independent-injury test, no additional damages are owed.

The Benefits-Lost Rule

Under Texas law, “the general rule is that an insurance company has no obligation to pay damages that exceed policy limits once those limits have been paid.” However, as described above, the Benefits-Lost Rule provides the first exception. This rule typically applies to 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.”[i]

Here, the insured argued that the insurer failed to promptly pay what she is contractually owed, not that the insurer’s actions and/or misrepresentations caused her to lose certain contractual rights. Accordingly, the Court correctly held that the Benefits-Lost Rule did not apply.

The Independent-Injury Rule

Regarding the second exception, the Independent-Injury Rule, the Court reiterated the rule that “An insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury independent from the loss of the benefits.”[ii]

Relying on Menchaca, the Court reasoned that an “injury is not ‘independent’ for the insured’s right to receive policy benefits if the injury ‘flows’ or ‘stems’ from the denial of that right.”[iii] Here, the insured’s main argument was that an “unreasonable delay unreasonable delay was the very reason why [insured’s] ALE limits were exhausted, resulting in her incurring additional out-of-pocket expenses for what would have otherwise been covered under the Policy....”

While the Court failed to make note of this, there is no interplay between Chapter 542 of the Texas Insurance Code violations (i.e. statutory interest on untimely or delayed payments) and the “independent injury rule.” Rather, the Independent-Injury Rule is rooted in an “actual damages” recovery theory and only relates to alleged violations of Chapter 541 of the Texas Insurance Code.

Nonetheless, the Court properly held that the insured’s out-of-pocket living expenses incurred due to the insurer’s delay and after her ALE coverage was exhausted was not an injury independent from the underlying claim. To date, no Texas court has recognized a viable independent injury under the rule.[iv]

Lastly, the Court granted summary judgment in favor of the insurer for the insured’s claim for personal property damage because the insured failed to provide competent summary judgment evidence to create a fact issue.

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[i] Id. at 497. 

[ii] Id. at 500.

[iii] Id.

[iv] See Menchaca, 545 S.W.3d at 499. (The Texas Supreme Court in Mechaca noted that a successful “independent injury” claim would be “rare.”).