Insurers Ask N.M. Supreme Court to Overturn Decision in Right of Action Case

The Alliance of American Insurers and several other insurance trade groups and companies have filed an amicus curiae brief with the New Mexico Supreme Court asking it to reverse an appellate court decision that would reportedly permit private bad faith actions against insurers.

At issue is a February 2003 ruling by the New Mexico Court of Appeals in Hovet v. Lujan holding that New Mexico public policy supports a direct private cause of action in favor of third-party claimants against automotive liability insurers that refuse to make good faith efforts to settle claims.

“Imposing a duty on an insurer to a third-party claimant would create an unavoidable conflict of interest because an insurer is under a duty to protect the interests of its insured, often making an insurer and a third-party claimant adversaries,” said Kirk Hansen, Alliance director of claims. “It also would lead to coerced, inflated settlements and multiple litigation, as claimants and lawyers would use the threat of a bad-faith lawsuit like a gun to the head of claims adjusters to extort unjustifiably high settlements. This, in turn, would inflate claims payments and attorneys’ fees without providing any substantial benefit to consumers.”

He noted that practical experience in other jurisdictions weighs strongly against recognizing a claim against an insurer by a third-party claimant for unreasonably failing to settle. “California went through a period in the 1980s during which, because of a court decision permitting private rights of action against insurers, virtually every claim was accompanied by a demand for immediate settlement under threat of a separate litigation for unfair claims settlement practices,” Hansen said. “It got to the point where insurers found it less expensive to accede to unreasonable settlement demands than face a second lawsuit based on alleged unfair claims practices. Insurers couldn’t challenge what was likely to be an inflated settlement demand because of the greater litigation costs to oppose the second lawsuit, regardless of the merits of the claim.”

The original Hovet v. Lujan lawsuit arose from a complaint filed by Jane Hovet against Steven and Arthur Lujan alleging that she was injured in an automobile accident caused by the negligence of Steven Lujan. Hovet amended the complaint joining Lujan’s liability insurer, Allstate Insurance Co. In her amended complaint, Hovet alleged that at the time of the accident, Lujan’s insurer owed a duty of good faith and fair dealing to Hovet. She further alleged that Allstate had breached its duty of good faith by refusing to “mediate, resolve and settle” her action and that Allstate’s actions were in violation of the state’s insurance code, which prohibits unfair and deceptive claims practices. A verdict in favor of Hovet was returned in the amount of $62,050 plus costs, which Allstate promptly paid.

In December 2000, Allstate filed a motion to dismiss Hovet’s claims against Allstate. Allstate argued that the duty of good faith and fair dealing only applies between insurer and insured, not insurer and claimant.

The trial court agreed and ordered that Hovet’s complaint against Allstate be dismissed with prejudice. Hovet appealed and on Feb. 19, 2003, the New Mexico Court of Appeals held that New Mexico public policy supports a direct private cause of action in favor of third-party claimants against automotive liability insurers who refuse to make good faith efforts to settle claims against their insureds.