Progressive Casualty Ins. Co. v. Vigil, No. 32,171 (N.M. Ct. App. Jan. 21, 2015).
Court of Appeals of New Mexico rules that district court abused its discretion in excluding evidence of previous coverage ruling in favor of insurer and insurer’s settlement of third-party claims against insured, and remands for new trial on bad faith claim.
Progressive Casualty Insurance Company filed a declaratory judgment action against Defendants Nancy Vigil and her son, Martin Vigil, asking the district court to determine that the Vigils had no coverage on the day Martin was involved in an automobile accident. The Vigils filed a counterclaim for bad faith. Nancy Vigil added a car to her automobile insurance policy in late September 2002. She paid the premium on October 3, even though it was not due until October 15. Later, Nancy Vigil received a notice from Progressive stating that her policy would renew on November 3. She called Progressive’s automated system to verify the renewal date, and the system told her that the next premium was due on November 15. As a result, she did not pay the premium on November 3. On November 4, Martin Vigil got into an automobile accident which killed one passenger and seriously injured another. Progressive initially advised the Vigils that they had coverage. A couple of weeks later, however, Progressive advised the Vigils that they did not have coverage because the policy had lapsed on November 3.
In December 2002, Progressive filed a declaratory judgment action on the coverage issue and the Vigils counterclaimed, alleged bad faith, among other claims.
While the declaratory judgment action was pending, Progressive settled the underlying wrongful death and personal injury claims against Martin Vigil for $100,000 each, subject to a reservation of rights. Progressive then amended its complaint to seek reimbursement from the Vigils for the $200,000 in the event the factfinder determined that the Vigils did not have coverage on the day of the accident. The district court granted partial summary judgment for Progressive on the coverage issue and a jury found that Progressive was entitled to reimbursement from the Vigils in the amount of $200,000. The Vigils appealed, and the Court of Appeals reversed the district court’s grant of partial summary judgment, finding that the issue of whether the Vigils had coverage involved disputed material facts. The Court of Appeals remanded for a new trial on the coverage and reimbursement claims.
The case was reassigned to a new judge while the appeal was pending. On remand, the district court granted summary judgment for the Vigils on the reimbursement issue. The district court concluded as a matter of law that Progressive did not have a right to seek reimbursement for the payments it made to settle the claims, even if the Vigils did not have coverage on the date of the accident. The district court also entered an order before trial prohibiting Progressive from introducing evidence or making any reference to the earlier proceedings, including the $200,000 Progressive paid to settle the third-party claims. During closing arguments at the second trial, the Vigils’ counsel stated that “[t]his case ha[d] been going on for nine years” and that during that time, Progressive “wouldn’t even pay for [Martin’s] truck, let alone all the other coverages they should have provided under the policy” (emphasis in opinion). The jury found that the Vigils had coverage on the date of the accident and that Progressive acted in bad faith regarding the coverage claims. The jury awarded approximately $40,000 in damages under the policy, $37,000 in compensatory damages and $11.7 million in punitive damages for their bad faith claim. The district court awarded the Vigils approximately $1.4 million in attorney fees and $35,000 in costs. Progressive appealed.
On appeal, Progressive argued that the district court erred by prohibiting Progressive from admitting evidence of (1) the previous judge’s ruling that the Vigils were not covered on the date of the accident, and (2) Progressive’s payment of $200,000 to settle third-party claims against the Vigils. In support of the first issue presented on appeal, Progressive argued that even though the coverage ruling was reversed on the first appeal, the fact that the district court initially ruled in Progressive’s favor indicates that Progressive did not act in bad faith and should not be liable for punitive damages.
The Court of Appeals agreed. “In New Mexico, an insurer acts in bad faith when it refuses to pay a claim of the policyholder for reasons which are frivolous or unfounded,” but “does not act in bad faith by denying a claim for reasons which are reasonable under the terms of the policy” (internal quotations and citations omitted). The Court of Appeals concluded that the exclusion of evidence of the previous judge’s ruling on the coverage issue was an abuse of discretion because that evidence was relevant to the issue of whether it was reasonable for Progressive to question the Vigils’ coverage. The Court of Appeals reached this conclusion for five reasons: (1) whether Progressive acted reasonably in disputing coverage was an important fact in determining whether Progressive acted in bad faith; (2) the fact that the previous judge determined that there was no coverage tends to make the fact that Progressive acted reasonably more probable than it would be without the evidence because it suggests that the coverage issue was fairly debatable; (3) cases from other jurisdictions have ruled that a district court’s previous rulings on coverage, even where they were later reversed, are dispositive of whether an insurer acted reasonably in disputing coverage; (4) exclusion of evidence regarding the prior ruling prevented the jury from considering that Progressive’s decision to persist with its coverage position may have been reasonably influenced by the fact that a judge had validated this position; and (5) the Vigils did not argue that any exceptions to the general rule that relevant evidence is admissible should apply in this case. The Court of Appeals added that its “decision regarding the admissibility of the previous ruling is only relevant to the issue of Progressive’s reasonableness under the bad faith claim and has no application to the jury’s prior determination of coverage.”
The Court of Appeals also concluded that the district court abused its discretion by excluding evidence of Progressive’s payment of $200,000 to settle claims against the Vigils. This evidence, too, was relevant to the Vigils’ bad faith claim against Progressive because “it tends to make it less probable that Progressive acted in bad faith over the course of the coverage dispute.” The Court explained that “[i]n making these payments, Progressive both compensated the third-party claimants and prevented the Vigils from having to defend themselves against personal injury and wrongful death claims.” The Court also noted that “the Vigils took advantage of [the district court’s] exclusionary ruling during closing arguments and gave the jury the false impression that Progressive had failed to pay anyone during the long nine-year time period that it had taken to litigate the insurance coverage dispute.” Thus, the Court of Appeals concluded that “it was unfair and an abuse of discretion to exclude evidence that was relevant to rebut the Vigils’ claim that Progressive acted unreasonably over the long course of the coverage dispute, especially where this exclusion presented the jury with an incomplete and one-sided picture of Progressive’s actions.”
The Court of Appeals reversed the judgment on the bad faith claim and the compensatory and punitive damages awarded on that claim, and remanded the case to the district court for a new trial on the bad faith claim. The Court of Appeals also vacated the award of attorney fees and costs because the applicable statute awards attorney fees and costs only upon a finding that the insurer acted unreasonably in refusing to pay a claim: “Because the reasonableness of Progressive’s actions in addressing the insurance coverage issue and pursuing a declaratory judgment decision remains to be resolved under the bad faith claim that is now remanded for a new trial, the award of attorney fees and cost[s] . . . must also be redetermined after the bad faith proceedings are resolved.”
