State Farm Mutual Automobile Insurance v. Safeco Insurance , 3 N.M. 623 ( 2013 )

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New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 16:40:54 2013.03.27
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
Opinion Number: 2013-NMSC-006
Filing Date: February 21, 2013
Docket No. 33,622
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,
Plaintiff-Appellant,
v.
SAFECO INSURANCE COMPANY,
NEW MEXICO MUNICIPAL LEAGUE and
NEW MEXICO SELF INSURERS’ FUND,
HALLMARK INSURANCE COMPANY,
formerly PHOENIX INDEMNITY INSURANCE COMPANY and
GEICO GENERAL INSURANCE COMPANY,
Defendants-Appellees,
and
FARMERS INSURANCE COMPANY OF ARIZONA,
Defendant-Appellant.
CERTIFICATION FROM THE NEW MEXICO COURT OF APPEALS
Sarah M. Singleton, District Judge
Guebert Bruckner, P.C.
Donald George Bruckner
Christopher J. DeLara
Paul Martin Cash
Travis J. White
Albuquerque, NM
for Appellant State Farm Mutual Automobile Insurance Company
Montgomery & Andrews, P.A.
Kevin M. Sexton
1
Albuquerque, NM
Andrew S. Montgomery
Jaime R. Kennedy
Santa Fe, NM
for Appellee Safeco Insurance Company
Hale & Dixon, P.C.
Timothy S. Hale
Albuquerque, NM
for Appellees The New Mexico Municipal League
and The New Mexico Self Insurers’ Fund
The Law Offices of Bruce S. McDonald
Bruce S. McDonald
Daniel P. Ulibarri
Albuquerque, NM
for Appellee Hallmark Insurance Company
Simone, Roberts & Weiss, P.A.
David William Frizzell
Albuquerque, NM
for Appellee Geico General Insurance Company
O’Brien & Padilla, P.C.
Daniel J. O’Brien
Albuquerque, NM
Keitha Anne Leonard
Santa Fe, NM
for Defendant-Appellant Farmers Insurance Company of Arizona
OPINION
CHÁVEZ, Justice.
{1} The questions certified to us by the Court of Appeals pursuant to NMSA 1978,
Section 34-5-14(C) (1972), require us to answer whether the primary or the secondary
underinsured motorist (UIM) insurer, if either, should be given the statutory offset for the
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tortfeasor’s liability coverage. State Farm Mut. Auto. Ins. Co. v. Safeco Ins. Co., No. 31,161,
¶ 5 (N.M. Ct. App. May 11, 2012) (order of certification to the New Mexico Supreme
Court). The following hypothetical is intended to give context to our discussion of the
relevant case law and resolution of the issue before us.
{2} A was a passenger in a vehicle driven by B, which was struck by a vehicle
negligently driven by C. A sustains $500,000 in damages. C has liability coverage of
$100,000. B has $100,000 in UIM coverage with XYZ Insurance Co. Because A was a
passenger in the vehicle insured by XYZ, A is a Class II insured under the XYZ policy, and
XYZ is the primary insurer because it insured the vehicle involved in the collision—the car
closest to the risk. A also has UIM coverage under three other policies, with policy limits
of $100,000, $50,000, and $25,000, respectively. A is a Class I insured under the three
policies because A is a named insured in each policy. Because these policies did not insure
the vehicle involved in the collision, the insurers who issued the policies are considered to
be secondary insurers. Therefore, A has $100,000 in primary UIM coverage, plus $175,000
in secondary UIM coverage, for a total of $275,000 in UIM coverage.
{3} The question in this case, as it relates to this hypothetical, is whether XYZ Insurance
Co. or the secondary insurers should receive an offset for the $100,000 of liability coverage
available from C, the tortfeasor. The Court of Appeals held in State Farm Mutual
Automobile Insurance Co. v. Jones, 2006-NMCA-060, ¶ 18, 139 N.M. 558, 135 P.3d 1277,
that the primary UIM insurer is entitled to the offset. Applying Jones to the hypothetical,
XYZ does not owe UIM benefits to A because the XYZ coverage equals C’s liability
coverage. This result is difficult to reconcile with our opinion in Tarango v. Farmers
Insurance Co. of Arizona, 115 N.M. 225, 227, 849 P.2d 368, 370 (1993), where we held,
consistent with the UIM approach we took in Branchal v. Safeco Insurance Co. of America,
106 N.M. 70, 71, 738 P.2d 1315, 1316 (1987), that the UIM insurer who insured the car
involved in the accident must pay its UIM policy limits before the secondary UIM insurers
must pay. Applying Tarango to our hypothetical, XYZ must pay its $100,000 before the
secondary insurers pay.
{4} However, neither Branchal nor Tarango specifically addressed which insurer, if any,
was to be given the offset for the tortfeasor’s liability coverage. Instead, as we had done in
previous cases, we simply used the offset to define the limits of the insured’s UIM recovery.
Schmick v. State Farm Mut. Auto. Ins. Co., 103 N.M. 216, 223, 704 P.2d 1092, 1099 (1985).
The recovery is limited to the lesser of the insured’s total damages or the insured’s total
stacked UIM coverage, minus the tortfeasor’s liability coverage. Id. at 219, 704 P.2d at
1095. Applying Schmick to our hypothetical, A has available to her $175,000 in UIM
benefits once C’s $100,000 in liability coverage has been deducted from the total stackable
UIM coverage of $275,000. We hold, consistent with Tarango and its progeny, that once
the limits of the insured’s UIM recovery are identified, the primary insurer must pay up to
its policy limits before secondary UIM insurers are required to pay in proportion to their
respective policy limits. Therefore, under our hypothetical, XYZ Insurance Co. pays the first
$100,000 in UIM benefits, and the secondary insurers pay the remaining $75,000 in UIM
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benefits in proportion to their policy limits. Thus, the short answer to the certified question
is that neither the primary nor the secondary insurers are directly awarded the offset because,
as we will explain, under existing case law, the offset is applied before any UIM insurer is
required to pay UIM benefits.
BACKGROUND
{5} On June 17, 2010, State Farm filed an action against other insurers seeking a
declaratory judgment to clarify how UIM statutory offsets should be applied between
primary and secondary insurers under New Mexico case law. In its complaint, State Farm
described six car accidents, three in which State Farm was the primary UIM insurer because
it insured the vehicle involved in the collision, and three in which it was a secondary UIM
insurer because its insured was injured while an occupant in someone else’s vehicle. State
Farm filed a motion for summary judgment, which prompted cross-motions for summary
judgment by the defendant insurance companies. On February 15, 2011, the district court
entered a final judgment declaring that the holdings in Tarango and Jones “cannot be
reconciled” and “cannot both be valid, current expressions of New Mexico law regarding the
application of the statutory offset between primary versus secondary UIM coverages.”
However, the district court then proceeded to explain that statutory offsets were not
specifically discussed in Tarango, and the question presented in Jones—which insurer gets
the offset—was not before the Supreme Court in Tarango. Therefore, the district court
concluded that Jones controlled, and the primary insurer was entitled to the statutory offset.
{6} Applying Jones, the district court found against State Farm on Counts I through III,
where it was the secondary insurer, and in favor of State Farm on Counts IV through VI,
where it was the primary insurer. State Farm appealed to the Court of Appeals, which
certified two questions to us. State Farm, No. 31,161, ¶ 5. The first question is whether the
Court of Appeals’ opinion in Jones conflicts with this Court’s opinion in Tarango. State
Farm, No. 31,161, ¶ 5. The second is “whether the statutory UIM offset should be applied
initially in favor of the primary or secondary insurer.” Id. We now address these questions,
applying a de novo standard of review. Salas v. Mountain States Mut. Cas. Co., 2009-
NMSC-005, ¶ 12, 145 N.M. 542, 202 P.3d 801 (we review a district court’s grant of
summary judgment de novo).
DISCUSSION
{7} The New Mexico uninsured motorist statute, NMSA 1978, § 66-5-301 (1983), is
implicated when an insured is injured in an accident and the tortfeasor is either uninsured
or underinsured. See Schmick, 103 N.M. at 219, 704 P.2d at 1095 (describing the broad
objective and limitations of the statute). We are only concerned with underinsured motorists
in this case. An “underinsured motorist” is defined as “an operator of a motor vehicle with
respect to the ownership, maintenance or use of which the sum of the limits of liability under
all bodily injury liability insurance applicable at the time of the accident is less than the
limits of liability under the insured’s uninsured motorist coverage.” Section 66-5-301(B).
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The policy reason for enacting UIM legislation is “to put an injured insured in the same
position he would have been in had the tortfeasor had liability coverage in an amount equal
to the uninsured/underinsured motorist protection purchased for the insured’s benefit.”
Schmick, 103 N.M. at 219, 704 P.2d at 1095.
{8} Therefore, in evaluating whether an injured insured has a UIM claim, one must
determine both the tortfeasor’s liability limits and the insured’s total UIM coverage, which
may include multiple stacked policies. “The term ‘stacking’ refers to an insured’s attempt
to recover damages in aggregate under more than one policy or one policy covering more
than one vehicle until all damages either are satisfied or the total policy limits are
exhausted.” Morro v. Farmers Ins. Grp., 106 N.M. 669, 670, 748 P.2d 512, 513 (1988).
{9} Whether multiple policies may be stacked requires an analysis of whether the injured
insured is a Class I or a Class II insured under the applicable policies. Class I insureds
include “the named insured, the spouse, and those relatives that reside in the household while
Class II insureds are insured by virtue of their passenger status in an insured vehicle.”
Tarango, 115 N.M. at 226, 849 P.2d. at 369. All UIM coverage for a Class I insured may
be stacked. Morro, 106 N.M. at 671, 748 P.2d at 514 (citing Schmick, 103 N.M. at 220, 704
P.2d at 1096). When the injured insured is a Class II insured under a policy insuring the
vehicle involved in the accident, the insured may stack that policy with any policy under
which he or she is a Class I insured. Morro, 106 N.M. at 672, 748 P.2d at 515. If the total
of the stackable coverage exceeds the tortfeasor’s liability limits, the tortfeasor is an
underinsured motorist. Schmick, 103 N.M. at 219, 704 P.2d at 1095. Assuming the
insured’s damages exceed the limits of the tortfeasor’s liability coverage, the insured may
pursue a claim against the UIM insurers to the extent of the insured’s damages or available
UIM policy limits, whichever is less. Id. at 222, 704 P.2d at 1098.
{10} However, when multiple UIM policies are available to the injured insured, our case
law has distinguished between primary and secondary UIM insurers. The primary UIM
insurer is the insurer that issued the policy on the vehicle involved in the collision that gave
rise to the insured’s injuries. Branchal, 106 N.M. at 71, 738 P.2d at 1316. The insured’s
remaining UIM insurers are secondary; they involve policies under which the insured is a
Class I insured. See Lopez v. Found. Reserve Ins. Co., 98 N.M. 166, 172, 646 P.2d 1230,
1236 (1982) (refusing to allow recovery by a Class II injured passenger from a policy
covering the Class I insured driver’s second vehicle, which had not been involved in the
accident at issue), holding modified on other grounds by Montano v. Allstate Indem. Co.,
2004-NMSC-020, ¶ 1, 135 N.M. 681, 92 P.3d 1255.
{11} The status of a UIM insurer as primary or secondary determines which insurer must
be the first to pay UIM benefits. In Tarango, we held that the primary UIM insurer had to
pay its policy limits before secondary UIM insurers have to pay. 115 N.M. at 227, 849 P.2d
at 370. The facts of Tarango help to explain our holding. Ms. Tarango was seriously
injured as a passenger in a car owned and driven by Ms. Alarcon when it was rear-ended by
a car driven by Mr. Martin. Id. at 226, 849 P.2d at 369. Tarango received $25,000 from
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Martin’s liability insurer, which represented Martin’s liability policy limits. Id. Tarango
made a claim against Alarcon’s UIM policy with Allstate as a Class II insured. Id. Tarango
also had two UIM policies with Farmers as a Class I insured. Id. All three UIM policies had
$25,000 policy limits. Id.
{12} The issue of Tarango’s damages was arbitrated pursuant to arbitration clauses in all
of the UIM policies. Id. The arbitrators found that Tarango’s damages equaled $40,000, and
after deducting the $25,000 already paid by Martin’s liability insurer, they entered a UIM
award of $15,000. Id. We described the sole issue before us in Tarango as whether the
Class II insurer was responsible for paying the entire $15,000 of UIM benefits, or whether
the Class I and Class II insurers had to pay a prorated portion of the $15,000. Id. at 225, 849
P.2d at 368. Allstate, as the Class II insurer, argued that our holding in Morro, which
affirmed the district court’s decision to prorate the payment of a UIM award among Class
I and Class II UIM insurers, required us to prorate. Tarango, 115 N.M. at 226, 849 P.2d at
369.
{13} Although we rejected the approach taken in Morro, largely because the Class I UIM
insurer did not object to the prorated credit given by the district court to the Class II insurer
in that case, Tarango, 115 N.M. at 226, 849 P.2d at 369, the discussion in Morro is
instructive. Morro was seriously injured when a tortfeasor struck her while she was loading
groceries into her daughter’s automobile. Morro, 106 N.M. at 669-70, 748 P.2d at 512-13.
The tortfeasor had $25,000 of liability coverage with Farmers Insurance of Arizona. Id. at
670, 748 P.2d at 513. Morro’s daughter had UIM coverage with Foundation Reserve for
$25,000, and Morro herself had two $25,000 UIM policies with Farmers Insurance. Id.
Morro received the tortfeasor’s $25,000 in liability limits and later argued that she was
entitled to stack the Foundation Reserve policy with her two Farmer’s policies, giving her
$75,000 in uninsured motorist benefits and making the tortfeasor an underinsured motorist.
Id. Morro’s damages were presumed to equal $75,000, and because the tortfeasor had paid
$25,000, the ultimate question we addressed was which UIM carrier was entitled to credit
for the tortfeasor’s $25,000 payment. Id. at 672-73, 748 P.2d at 515-16. Foundation
Reserve argued that its liability should be offset by the tortfeasor’s coverage, and that
because the tortfeasor had $25,000 in coverage, which equaled Foundation’s UIM policy
limit, Foundation did not owe Morro any UIM benefits. Id. at 670, 672-73, 748 P.2d at 513,
515-16. Alternatively, Foundation argued that because there were two UIM insurers, the
credit for the tortfeasor’s liability insurance should be divided equally between the two
insurance companies. Id. at 672, 748 P.2d at 515. We rejected both arguments and affirmed
the district court’s decision to prorate the offset among the three policies. Id. at 673, 748
P.2d at 516.
{14} If the Court of Appeals’ holding in Jones had preceded Morro and Tarango, the
insurer who insured the car involved in each collision (i.e., the primary insurer) would have
escaped liability. The Jones court accepted the exact argument that we rejected when
Foundation Reserve raised it in Morro. Compare Jones, 2006-NMCA-060, ¶¶ 3, 19 (the
Court of Appeals accepted the primary insurer’s argument that because it was entitled to the
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offset, its liability was reduced to zero), with Morro, 106 N.M. at 670, 672-73, 748 P.2d at
513, 515-16 (rejecting primary insurer’s argument that it was not liable for any amount of
UIM coverage because its liability was entirely offset by the tortfeasor’s liability coverage).
We agree with State Farm’s argument that we were not asked to distinguish between primary
and secondary insurers in Morro. However, when we were asked to do so, we made it clear
that the primary UIM insurer must pay its policy limits before secondary UIM insurers are
required to pay benefits. Tarango, 115 N.M. at 227, 849 P.2d at 370. Applying this
principle in Tarango, we held that the primary UIM insurer, which had a policy limit equal
to the tortfeasor’s liability policy limit, had to pay UIM benefits. Id. at 226-27, 849 P.2d at
369-70. Had we applied the principle announced in Jones—that the primary insurer should
be the first to receive the statutory offset—to the facts in Tarango, the result would have
been different; the primary insurer would not have owed any UIM benefits and the UIM
payment obligation would have shifted entirely to the secondary UIM insurers.
{15} To ask which insurer is entitled to the statutory offset is to over-think the issue of
offsets and to ignore the principled pragmatism of the jurisprudence that declared the need
for an offset in the first place. As early as 1985, we interpreted the UIM statute as providing
a formula for computing whether a tortfeasor is an underinsured motorist and by what
amount. Schmick, 103 N.M. at 222, 704 P.2d at 1098. We stated that
[t]he formula is the criterion to be used in determining underinsurance
benefits due and it defines the parameters within which recoveries must stay.
Therefore, an insured collects from his underinsured motorist carrier the
difference between his uninsured motorist coverage and the tortfeasor’s
liability coverage or the difference between his damages and the tortfeasor’s
liability coverage, whichever is less.
Id. The offset is built into the formula that limits the insured’s recovery of UIM benefits.
Because the tortfeasor’s liability limits are taken into consideration, any UIM insurer,
whether primary or secondary, should not be concerned that the insured will receive more
compensation than what is permitted by the UIM statute as interpreted by case law. We see
no reason to depart from an analysis that has survived a quarter of a century.
{16} We recognize that we denied certiorari in Jones. 2006-NMCA-060, certs. denied,
2006-NMCERT-005, 139 N.M. 568, 136 P.3d 569 (Nos. 29,781 & 29,779, May 25, 2006).
Because we did so, Jones was indeed the precedent to be followed by the lower courts. We
thank the Court of Appeals, and particularly Judge Michael Bustamante, who authored the
Jones opinion and signed the order certifying the questions to us in this case, for calling our
attention to this issue once again. It appears that courts have struggled to reconcile the Jones
and Tarango opinions. Indeed, all of the insurers in this case have asked us to clarify the
state of the law with respect to statutory offsets and have urged us to keep the solution
simple. Although we find simplicity in the approaches taken by the Morro and Jones courts,
we also find simplicity in the approach taken in Tarango. In Tarango, we rejected a pro rata
approach and held that the primary UIM insurer must exhaust its policy limits before
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secondary UIM insurers have to pay UIM benefits, reasoning that the primary insurer
contracted to cover occupants in its insured’s vehicle who are injured by uninsured or
underinsured motorists, and collected a premium specifically for doing so. 115 N.M. at 227,
849 P.2d at 370.
{17} Just as the limits on what an insured may recover in UIM benefits have not changed,
neither has the rationale for holding that the primary UIM insurer must first exhaust its
policy limits before secondary UIM insurers have to pay UIM benefits. To award the
statutory offset to the primary insurer first, as the Court of Appeals did in Jones, would
undermine our holdings in Branchal, Tarango, and Morro. This approach would give
primary insurers the benefit of the offset—sometimes entirely absolving their
liability—despite the fact that the primary insurer is the closest to the risk. We adhere to our
statement in Tarango that
[I]t is the better and more reasonable rule to require the insurer of the vehicle
in which the injured party was riding as a passenger, rather than as an owner
or driver, to first pay un[der]insured motorist benefits before the injured
party’s insurer may be required to pay under its un[der]insured motorist
coverage.
115 N.M. at 226-27, 849 P.2d at 369-70 (second and third alterations added) (quoting
Branchal, 106 N.M. at 70, 738 P.2d at 1315). To hold as the Jones court did would
potentially require a secondary insurer to pay more than its proportionate share, even though
its insured’s vehicle was not involved in the accident—a result we specifically rejected in
Tarango. See 115 N.M. at 227, 849 P.2d at 370 (“The underinsured liability must first be
assessed against [the primary insurer] to the limits of its policy before demand can be made
upon [the secondary insurer]. . . . To allow proration . . . would require [the secondary
insurer] to pay twice as much under its policies even though its insured’s vehicle was not
involved in the collision.”). Accordingly, we overrule the Court of Appeals’ opinion in
Jones, 2006-NMCA-060, to the extent that it is inconsistent with our holding in this case.
{18} Applied to the six accidents in the present case, the primary UIM insurer shall
exhaust its policy limits before the secondary insurers must pay UIM benefits in an amount
proportionate to their respective policy limits. Because we do not know the number of
secondary policies or the policy limits for each secondary policy, we cannot specify the
allocation in the various cases brought by State Farm. However, to illustrate our ruling we
return to the hypothetical we announced at the beginning of this opinion. Assume that the
insured has $500,000 in damages. The tortfeasor has $100,000 in liability coverage. The
primary UIM insurer has $100,000 in UIM benefits. There are three secondary insurers, one
with $100,000 in UIM benefits, one with $50,000 in UIM benefits, and the last with $25,000
in UIM benefits. The tortfeasor is an underinsured motorist because the injured insured has
UIM benefits totaling $275,000, which is $175,000 more in UIM coverage than the
tortfeasor has in liability coverage.
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{19} The UIM benefits due to the injured insured are $175,000. Although the insured
sustained $500,000 in damages, the insured is limited to recovering in UIM benefits the
difference between the insured’s total UIM coverage and the tortfeasor’s liability coverage.
The primary UIM insurer pays its entire $100,000, leaving the secondary UIM insurers
obligated to pay a prorated portion of $75,000. One secondary insurer pays $42,857.14,
which is 4/7ths (100,000/175,000) of $75,000; one pays $21,428.57, which is 2/7ths
(50,000/175,000) of $75,000; and the remaining secondary insurer pays $10,714.29, which
is 1/7th (25,000/175,000) of $75,000. In no case will the insured receive more than the
limits of the insured’s UIM coverage minus the tortfeasor’s liability payment or more than
the insured’s damages minus the tortfeasor’s liability payment, whichever is less.
CONCLUSION
{20} The answers to the questions certified to us by the Court of Appeals are as follows.
With respect to the first question: Yes, the Court of Appeals’ holding in Jones conflicts with
our opinion in Tarango. With respect to the second question: Consistent with our holding
in Tarango, the primary UIM insurer must pay up to its policy limits before a secondary
UIM insurer is required to pay UIM benefits. The statutory offset for a tortfeasor’s liability
coverage is contained within the formula we announced in Schmick for computing the
underinsurance benefits due an insured.
{21} IT IS SO ORDERED.
_______________________________
EDWARD L. CHÁVEZ, Justice
WE CONCUR:
___________________________________
PETRA JIMENEZ MAES, Chief Justice
___________________________________
RICHARD C. BOSSON, Justice
___________________________________
CHARLES W. DANIELS, Justice
___________________________________
BARBARA J. VIGIL, Justice
Topic Index for State Farm. Mut. Auto Ins. Co. v. Safeco Ins. Co., No. 33,622
APPEAL AND ERROR
Certification
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Standard of Review
CIVIL PROCEDURE
Certification
INSURANCE
Motor Vehicle Insurance
Primary, Secondary, or Other Coverage
Stacking
Uninsured or Underinsured Motorist
10