Coverage Analysis
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STATE BY STATE SURVEY
NEW MEXICO
 (10th Circuit)
 

  ACCIDENTS OR OCCURRENCES

  The New Mexico Supreme Court construed the meaning of "expected or intended" for the first time in Knowles v. USAA, 832 P.2d 394 (N.M. 1992), holding that the insured's intentional eviction of its tenant was not an "occurrence."  Even though the insured may not have foreseen or intended the precise injury that resulted from its deliberate acts, there is no coverage if the insured meant to cause harm "of the same general type." Id.

  Intent may be inferred as a matter of law in cases of sexual assault.  Sena v. Travelers Ins. Co., 801 F.Supp. 471 (D.N.M. 1992).
 

  ALLOCATION AND SCOPE ISSUES

  Although an insurer may limit its payment obligation to covered damages, it may not pro-rate its obligation to pay defense costs merely because some of the claims are not covered. American Employers Ins. Co. v. Continental Casualty Co., 512 P.2d 674, 677 (N.M. 1973). 

  While not reaching the issue, the Tenth Circuit has suggested that a policyholder that failed to purchase insurance should not be treated as a "self-insurer" for the purpose of allocating a judgment among various policy periods since, in the absence of policy limits, there is no way of determining how much to apportion to the insured's period.  Valley Improvement Association, Inc. v. USF&G, 129 F. 3rd 1108 (10th Cir. 1997).
 

  APPELLATE PROCEDURES

  New Mexico has both an intermediate appellate court and a state Supreme Court.
 

  BAD FAITH

  Aggrieved insureds may sued for unfair claims practices under N.M. Stat. Ann. § 59A-16-30 (1984). Unfair or deceptive consumer practices are proscribed by N.M. Stat. Ann. § 57-12-1 (Michie 1987 & Supp. 1993).  Unfair claims handling by insurers is regulated under N.M. Stat. Ann. § 59-11-13 (1978).

  Under New Mexico law, bad faith may not be claimed unless there is a separate finding that the insurer had a contractual duty to pay under the policy.  Charter Services, Inc. v. Principal Mutual Life Ins. Co., 117 N.M. 82, 868 P.2d 1307 (1994).  

  An insurer must act in good faith in handling the defense and possible settlement of the claims against its policyholder.  Ambassador Ins. Co. v. St. Paul Fire & Marine, 690 P.2d 1022 (N.M. 1984).  If an insurer wrongfully refuses to defend an action, it may become liable for any subsequent settlement that is entered into between the plaintiff and the insured in good faith that is reasonable.  State Farm v. Price, 684 P.2d 524, 531 (pp. 1984).

  The determination of whether an insurer has acted reasonably or not is based upon an objective standard.  Jackson National Life Ins. Co. v. Receconi, 827 P.2d 118, 135-36 (N.M. 1992).  

  Under New Mexico law, where  there is a substantial likelihood of recovery and excessive limits, an insurer’s unwarranted refusal to settle within limits is a breach of the implied covenant of good faith and fair dealing.  Dairyland Ins.  Co.  v.  Herman, 954 P.2d 56, 61 (N.M. 1997).  New Mexico does not recognize a cause of action against an insurer for negligent failure to settle.  Ambassador Ins. Co. v. St. Paul Fire & Marine Ins. Co., 690 P.2d 1022, 1025 (N.M. 1984) (no liability where insurer acted honestly and in good faith in refusing to settle).   On the other hand, if an insurer refuses to settle in bad faith, it is liable for the entire amount of the judgment, including the amount in excess of policy limits.  Dairyland, 954 P.2d at 61; Lujan v.  Gonzales, 501 P.2d 673, 684 (N.M. 1972).   

  The New Mexico Supreme Court has ruled that an insurer did not act in bad faith in refusing to afford coverage, even where its agent misrepresented the scope of coverage.  Charter Services, Inc. v. Principal Mutual Life Ins. Co., 868 P.2d 1307, 1313 (N.M. 1994).  

  The Tenth Circuit has declared that a liability insurer has no affirmative obligation to conduct an investigation of the facts underlying a lawsuit before denying coverage.  It does not act "unreasonably" or in bad faith by doing same.  Valley Improvement Association, Inc. v. USF&G, 129 F. 3rd 1108 (10th Cir. 1997) and  Winters v. Transamerica Insurance Company, 98-2000 (10th Cir. September 9, 1999).

  The New Mexico Supreme Court has ruled that gross negligence may no longer serve as a basis for awarding punitive damages against insurers, holding that henceforth evidence of an "evil motive" would be required to establish bad faith.  Paiz v. State Farm Fire & Cas. Co., 118 N.M. 203, 880 P.2d 300 (N.M. 1994).

  The Tenth Circuit has ruled that a District Court did not err in excluding the insured’s bad faith expert where the expert lacked special expertise as to liability claims handling and as these were issues that the jury was capable of determining for itself.  City of Hobbs v.  Hartford Fire Ins.  Co., No.  96 2212 (10th Cir.  November 9, 1998).

  Although New Mexico has not specifically recognized a cause of action for reverse bad faith, it does permit the award of sanctions for frivolous claims if the insured had a subjective awareness that there was no factual support for the claims.  City of Farmington v. L.R. Foy Construction Co., 816 P.2d 473 (N.M. 1991).
 

  "BODILY INJURY"

  Emotional injuries suffered by victims of a pedophilic priest that were "realized" during the insurer's policy were not a "bodily injury" sufficient to trigger a duty to indemnify in Servants of the Paraclete v. Great American Ins. Co., 857 F.Supp. 822 (D.N.M. 1994).
 

  BREACH OF POLICY CONDITIONS

  Duty to provide notice does not arise until insured reasonably believes that it may be subject to a claim of liability.  Schroth v. New Mexico Self-Insurers Fund, 832 P.2d 399 (N.M. 1992)(UM coverage).  Coverage required unless delay caused "substantial" prejudice. Foundation Reserve Ins. Co. v. Esquibel., 94 N.M. 132, 607 P.2d 1150 (1980).     

  The Supreme Court extended these rulings to the "voluntary payment" prohibition in the CGL policy, ruling in Roberts Oil Co. v. Transamerica, 833 P.2d 222 (N.M. 1992).  The court ruled in Roberts, however, that an insured's assumption of liability without notice to an insurer created a presumption of prejudice that the insured must overcome in order to receive coverage.
 

  BROAD FORM COVERAGES

  The U.S. Court of Appeals for the Tenth Circuit ruled in Winters v. Transamerica Ins. Co., 194 F.3d 1321 (10th Cir. 1999)(unpublished)–full text at 1999 U.S. App. LEXIS 21632)  that a HUD suit alleging that a trailer park operator had harassed minority tenants and otherwise engaged in discriminatory housing practices established a claim for “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor.”   
 

  BURDEN OF PROOF

  Insured has initial burden of showing that its claim is within the scope of coverage. Chronister v. State Farm, 381 P.2d 673 (N.M. 1969).

  An insured has the burden of proving the issuance and terms of a missing policy.  Harden v. St. Paul Fire & Marine Ins. Co., 178 P.2d 578, 579 (N.M. 1947).  In Servants of the Paraclete v. Great American Ins. Co., 857 F.Supp. 822 (D.N.M. 1994), the court ruled that said proof need only be to a "preponderance of the evidence" standard (rejecting insurer's proposed "clear and convincing" standard).
 

  CHOICE OF LAWS

  Governed by state in which last act necessary to make contract binding occurred.  Pound v. INA, 439 F.2d 1059 (10th Cir. 1971).
 

  CONFLICTS OF INTEREST

  An insurer may demand that a policyholder obtain independent counsel when the insurer perceives a conflict of interest.  American Employers Ins. Co. v. Crawford, 533 P.2d 1203, 1209 (N.M. 1975).
 

  DECLARATORY JUDGMENT ACTIONS

  The determination of whether an exclusion applies should be made in the primary lawsuit, not in an action for declaratory relief, as it rests upon factual issues that are to be determined in the tort action.  Lopez v. New Mexico Public Schools Insurance Authority,  870 P.2d 745, 748 (N.M. 1994).  In such circumstances, the insurer should present the facts at issue to the trial court in the underlying suit and request to be relieved of the duty to defend rather than advocating its responsibility to its insured, awaiting the outcome of the case and then suing its own insured in a declaratory judgment action.  Mullenix, 642 P.2d at 605-606.  (“We believe this is the better rule because it prevents multiple suits and avoids the expense to insured of defending a collateral action brought by the insurer for a declaration of the insurer’s obligation to defend under the policy). 

  New Mexico courts have criticized insurers for refusing to defend based upon a unilateral determination that the actual facts do not support a claim for coverage.  Peterson v. Transamerica Ins. Co., No. 86-0915 (D.N.M. February 11, 1988).
 

  "DAMAGES" 

  Held to include clean up costs by trial court in City of Farmington v. L.R. Foy Construction Co., San Juan County District Court, No. CV 87-271-1 (New Mexico December 21, 1988).
 

  DISCOVERY ISSUES
   --Claims Manuals
 

   --Drafting History
 

   --Other Policyholder Claims
 

   --Reinsurance Information
 

   --Reserves
 

  DUTY TO DEFEND

  An insurer’s obligation arises where allegations in a complaint “potentially” or “arguably” give rise to coverage.  Servants of Paraclete, Inc. v. Great American Ins. Co., 857 F.Supp. 822, 829 (D.N.M. 1994).  “Only where the allegations are completely outside policy coverage may the insurer justifiably refuse to defend.”  State Farm Fire & Casualty Co. v. Price, 684 P.2d 524, 528 (N.M. App. 1984).  
 
   An insurer may not look beyond the allegations of the complaint to avoid a duty to defend, nor may it rely on the facts ultimately established in the litigation, or the impossibility of damages being awarded against its insured to justify a refusal to defend.  Valley Improvement Association, Inc. v. USF&G, 129 F.3d 1108 (10th Cir.1997). 

  The insurer may not look to facts outside of the complaint or which are contrary to the allegations of the complaint in order to eliminate a duty to defend that otherwise exists.  Foundation Reserve Ins. Co. v. Mullenix, 642 P.2d 604, 605 (N.M. 1982).  In short, the duty to defend is based upon the factual allegations, not the actual facts.  State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979, 985 (10th Cir. 1994).  However, there must be actual factual allegations.  Mere abstract or unsubstantiated allegations will not trigger a duty to defend.  Id. at 985.  

  The Supreme Court of New Mexico has ruled that the duty to defend is triggered by allegations in a suit against the insured even if the truth of those allegations is contradicted by the insurer’s own investigation.  Similarly, an insurer has an obligation to provide a complete defense to a complaint even though certain of the allegations may be excluded.  Lopez v. New Mexico Public Schools Insurance Authority, 870 P.2d 745, 747 (N.M. 1994)(“the focus must be on the origin of the damages, not the legal theory asserted for recovery.”).  

  The Tenth Circuit has declared that an insurer has no affirmative obligation to conduct an investigation of the facts underlying a lawsuit, nor is it obligated to reimburse an insured for costs expended before the date of tender. Valley Improvement Association, Inc. v. USF&G, 129 F.3d 1108 (10th Cir.1997). 

  A federal district court has ruled that a liability insurer may recover fees that it has paid for the defense of its insured under a reservation of rights if it is subsequently found not to owe coverage.  In Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190 (M.D. La. 1996)(New Mexico law), the court suggested that such a right might not be available if the insured had objected to this aspect of the insurer's reservation of rights, however.
 

  ESTOPPEL AND WAIVER

  New Mexico has rejected the majority rule that an insured may not use estoppel as a basis for broadening coverage beyond what is actually provided under the written terms of the contract.  King v. Travelers Ins. Co., 505 P.2d 1226 (N.M. 1973).

  Where an insurer has refused to defend, it loses the right to dispute the wisdom of its policyholder entering into a settlement without its consent.  American General Fire & Casualty Co. v. Progressive Casualty Co., 799 P.2d at 1113, 1117 (N.M. 1990).  Further, the insurer will be bound by such a settlement so long as it is negotiated in good faith.  Valley Improvement Association, Inc. v. USF&G, 129 F.3d 1108, 1125 (10th Cir. 1997)(failure to defend estops insurer from contesting indemnity.    In such circumstances, the insurer is estopped to raises any coverage defenses that might otherwise have limited its indemnity obligation.   Winters v. Transamerica Insurance Company, 98-2000 (10th Cir. September 9, 1999);  American General Fire and Casualty Company v. Progressive Casualty Company, 799 P. 2nd 1113, 1117 (N.M. 1990) and State Farm Fire and Casualty Company v. Price, 684 P. 2nd 524, 531 (N.M. App. 1984).

  On the other hand, absent evidence of bad faith, an insurer is only liable up to its policy limits in such circumstances.  State Farm Fire & Casualty Co. v. Ruiz, 1999 WL 66212 (D.N.M. January 29, 1999).  Further, an insurer that refuses to defend is only bound to a settlement that is reasonable and negotiated in good faith.  Continental Casualty Co. v. Westerfield, 961 F.Supp. 1502, 1504 (D.N.M. 1997).  An insurer is free to contest the policyholder’s good faith in making the settlement as well as the reasonableness of the amount.  Lujan, 501 P.2d at 680.  Where the insured enters into a consent judgment together with a covenant not to execute against the insured, there is a “high potential for fraud or collusion.”  Westerfield, 961 F.Supp. at 1504.  
 

  KNOWN LOSS

  Claims under a first party policy for the cost of removing asbestos from buildings in which the asbestos had been installed prior to the insured's acquisition were held to be a "known loss" in Leafland Group II v. INA, 881 P.2d 26 (N.M. 1994).
 

  NUMBER OF OCCURRENCES

  No cases.
 

  POLLUTION EXCLUSION

  "Sudden" held to have a temporal meaning in Mesa Oil Co. v. INA, No. 2:95-CV-696 (D. Utah January 5, 1996), aff'd, 123 F.3d 1333 (10th Cir. 1997)(New Mexico law) and Ever Ready Oil Co., Inc. v. Ranger Ins. Co., No. 90-1190 JP (D.N.M. August 21, 1992)("sudden and accidental" only extends coverage to "abrupt and unintended discharges").

  In Mesa, the 10th Circuit also ruled that whether a discharge is "accidental" must be considered from the standpoint of the polluter, not the insured.

  Absolute exclusion upheld in Bituminous Cas. Corp. v. Basin Disposal, C.A. No. 87-1019 (D.N.M. April 20, 1989).  Similarly, a Louisiana court applying New Mexico law ruled in  Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190 (M.D. La. 1996) that the exclusion defeated coverage for personal injuries resulting from a release of chemical fumes from an explosion in a truck that the insured had formerly leased.

  The New Mexico Court of Appeals ruled in Espander v. City of Albuquerque, 849 P.2d 384 (N.M. App. 1993) that terms such as "liquid" or "waste material" in the absolute exclusion implied a toxic content and would not encompass flood waters.
 

  PUNITIVE DAMAGES

  Punitive damages are only recoverable based upon proof that the defendant acted with “evil nature or other culpable mental state.”  Teague-Strebeck Motors v. Chrysler Insurance Company, 1999 N.M. App. LEXIS 80 (N.M. App. 1999).  

  Punitive damages are insurable under New Mexico law absent an express exclusion for such awards in the policy or a policy to which the insurer follows form.  Rummell v. St. Paul Surplus Lines Ins. Co., 1997 N.M. LEXIS 331 (N.M.August 8, 1997).  However, a liability policy may be drafted to exclude coverage for punitive damages, so long as the coverage restriction is plainly called to the attention of the insured.  Baker v. Armstrong, 744 P.2d 170, 171 (N.M. 1987).  

  STANDARDS FOR POLICY INTERPRETATION

  In determining whether a contract is ambiguous, the New Mexico Supreme Court has advised trial courts to consider the four corners of the contract, "as well as the circumstances of the contract creation."  Rummell v. St. Paul Surplus Lines Ins. Co., 1997 NM LEXIS 331 (N.M. August 8, 1997).  In determining whether coverage is afforded, the court will also consider the reasonable expectations of the insured.  Pribble v. Aetna Life Ins. Co., 84 N.M. 211, 501 P.2d 255 (1972).  In the event of ambiguity, the availability of coverage requires an assessment of all of the surrounding facts concerning the contracts.  However, the absence of extrinsic evidence clearly indicating an intent not to afford coverage, ambiguities will be resolved in favor of the insured.   Rummell v. St. Paul Surplus Lines Ins. Co., 1997 NM LEXIS 331 (N.M. August 8, 1997). "If the language of the insurance policy is such that a layman could not understand its full impact, the policy expectations of the insured" will be honored.  Davison v. Businessmans Assurance Company of America, 85 N.M. 796, 518 P.2d 776, 778 (1974).  
 

  THEORIES OF ALTERNATIVE LIABILITY

  No cases.
 

  TRIGGER OF COVERAGE
 
  The New Mexico Supreme Court has ruled that an insured's discovery that its building had asbestos in it did not trigger first party insurance where the asbestos had been installed prior to the issuance of the policy. Leafland Group II v. INA, 881 P.2d 26 (N.M. 1994).

  A liability insurer was ruled to owe coverage for sexual molestation incidents that occurred during its policy but was not obligated to defend claims arising out of incidents pre-dating its coverage, nor did insurers have any indemnity obligation for injuries that were "realized" by the plaintiffs in later policy years.  Servants of the Paraclete v. Great American Ins. Co., 857 F.Supp. 822 (D.N.M. 1994).

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