The Independent Injury Rule Is Dead!

May 11, 2018, is a day that shall live in infamy for insurance law plaintiff attorneys. On that day, the Fifth Circuit declared the independent injury rule as dead in Aldous, PC v. Darwin National Assurance Company,¹ citing the substituted April 13, 2018, Menchaca II opinion.²

In the Fifth Circuit’s previous ruling, Aldous v. Darwin Nat’l Assurance Co., 851 F.3d 473, 485 (5th Cir. 2017), the court had determined that plaintiff’s Chapter 541 Texas Insurance Code claims were barred under Parkans International LLC v. Zurich Insurance Company,³ which held:

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.⁴

The independent injury or injury independent rule came to light in Republic Insurance Company v. Stoker,⁵ and managed to be misinterpreted in dozens of state and federal cases thereafter. In Stoker, the insurer had determined that the insured’s policy did not provide coverage for her loss. After summary judgment was entered on plaintiff’s breach of contract claim, a jury returned a verdict for the plaintiff on her bad faith claims. The Supreme Court of Texas then had to decide whether the defendants were liable to the plaintiff for denying the claim for an incorrect reason when there was a correct reason for denial that was not given to plaintiff during the settlement of the claim. The supreme court held that if the insurer denies a claim that is not covered, as a general rule there can be no bad faith claim unless the insurer commits an act, so extreme, that would cause injury independent of the policy claim.

That rule has been repeated many times but not one decision has ever found or described what an injury independent of the policy claim looks like. In Menchaca, the Supreme Court of Texas wrote:

Our reference to 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) (‘[t]he 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….’).

The Menchaca court went on to state:

We have further limited the natural range of injury by insisting that an injury is not ‘independent’ from the insured’s right to receive policy benefits if the injury ‘flows’ or ‘stems’ from the denial of that right.

Despite the fact that no one really knew what an independent injury was, its phantom existence was used to grant hundreds of summary judgments for insurers that resulted in the dismissal of plaintiff insureds’ extra-contractual claims.

Now, the independent injury or injury-independent rule is dead. In Aldous, a Fifth Circuit panel consisting of Judges Reavley, Elrod, and Graves, held that,

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 violation caused the loss of the benefit.’ Put simply, Parkans’s categorical bar does not hold up in the face of Menchaca. (Emphasis added.)

Aldous will help insureds who have been losing extra-contractual claims though defendants’ summary judgments for failure to show an independent injury or injury-independent separately from the denial of benefits under the policy. Those days, thankfully, are gone.
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¹ Aldous, PC v. Darwin National Assurance Co., No. 16-10537 (5th Cir. May 11, 2018).
² USAA Tex. Lloyds Co. v. Menchaca, No. 14-0721, 2017 WL 1311752 (Tex. April 7, 2017) rehearing granted (Dec. 15, 2017) opinion withdrawn and superseded, USAA Tex. Lloyds Co. v. Menchaca, 61 Tex. Sup Ct. J. 743, 2018 WL 1866041 (Tex. April 13, 2018).
³ Parkans International LLC v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002).
⁴ Id. at 519. (Emphasis added.)
⁵ Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995).