Predictably, the American Insurance Association (AIA) issued a press release saying that the ruling could lead to higher insurance costs in New Mexico unless the New Mexico legislature writes new laws to clearly outlaw such lawuits. "This case takes New Mexico way out of the mainstream by imposing third party bad faith on compulsory auto insurers. Most other states have refused to adopt this principle, for good reason," said David Snyder, AIA vice president and assistant general counsel.
Third party bad faith is most often seen in matters of personal injury rather than property damage, but the law would presumably be the same for property damage as it is for personal injury. "If the insurer of the driver at fault would offer no more than $1,000 to pay for repairs to a car that actually cost $4,000, the insurer could face a bad faith lawsuit with punitive damages," said an attorney familiar with bad faith law. The attorney added that anyone seeking punitive damages would have to show that such low ball offers were a regular business practice of the insurer and not just an error in judgment by an adjuster.
"This decision will adversely affect every family and business who owns a motor vehicle in New Mexico by unnecessarily raising their costs because the potential of "bad faith" liability will be used to leverage insurers into settling claims that should be contested or settling for more than is objectively justified," said Snyder. "The resulting higher costs will put upward pressure on the auto insurance premiums that nearly everyone pays."
The case, Hovet v. Lujan, arose when Hovet was hit by a vehicle driven by Lujan and insured by Allstate. Hovet sustained injuries resulting in more than $11,000 in medical bills and Allstate offered her $7,200 to settle the case or she could choose to go to trial. Hovet chose to sue Lujan and Allstate, and she was awarded by a jury $62,050 for her injuries. Allstate paid the jury award and court costs, but contested Hovet's right to sue the insurer under a separate unfair practices claim. A District Court subsequently threw out the claim against Allstate, but the New Mexico Court of Appeals later ruled that the lawsuit could be allowed, and the New Mexico Supreme Court agreed last week by vote of 4-1. The case could now be sent back for a jury trial on bad faith against Allstate.
"This decision is based on a reckless reading of statutory language, which was quite clear that the legislature intended private rights of action only for an insurer's own policyholder, with whom the insurer has a contract and owes duties. Indeed, by imposing duties on insurers to cooperate with the parties suing the insurer's own customers, the insurers are put in an impossibly conflicted position," explained Snyder.
Third party bad faith lawsuits were once permitted in several states, including California from 1979 to 1988. Trial lawyers for plaintiffs said such third party bad faith lawsuits were a good thing because they encourged insurers come to the table and settle cases quickly and reasonably rather than proceeding to trial. In 1988 a newly configured California Supreme Court reversed the decision (Moradi-Shalal v. Fireman's Fund Insurance) in that state. "Since then, auto insurance premiums in California have been stable," Snyder said.