New Mexico recognizes both common law and statutory bad faith claims against insurers, with courts identifying numerous specific examples of conduct that constitute bad faith. The primary statutory framework is found in the New Mexico Insurance Code, and New Mexico courts have developed a rich body of case law defining and illustrating bad faith conduct.

Under N.M. Stat. Ann. § 59A-16-20, the New Mexico Legislature has defined specific practices that, when knowingly committed with such frequency as to indicate a general business practice, constitute unfair and deceptive claims practices (N. M. S. A. 1978, § 59A-16-20). These statutory examples of bad faith conduct include:

• Not attempting in good faith to effectuate prompt, fair, and equitable settlements of an insured’s claims in which liability has become reasonably clear ( M. S. A. 1978, § 59A-16-20)
• Failing to settle an insured’s claims promptly where liability has become apparent under one portion of the policy coverage in order to influence settlement under other portions of the policy coverage ( M. S. A. 1978, § 59A-16-20)
• Failing to promptly provide an insured a reasonable explanation of the basis relied on in the policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement ( M. S. A. 1978, § 59A-16-20)

Any person who has suffered damages as a result of a violation of Article 16 by an insurer is granted a right to bring an action in district court to recover actual damages, and the court may award attorneys’ fees to the prevailing party (N. M. S. A. 1978, § 59A-16-30).

New Mexico courts have long recognized that a court may find bad faith when a liability insurer refuses to settle after being asked to do so while at the same time demonstrating disregard for the interests of its insured (Rummel v. Lexington Ins. Co., 123 N.M. 752 (1997). When there is a substantial likelihood of recovery in excess of limits, an insurer’s unwarranted refusal to settle is a breach of the implied covenant of good faith and fair dealing (Sherrill v. Farmers Ins. Exchange, 374 P.3d 723 (2016). Should an insurer, in violation of its duty of good faith, refuse to accept a reasonable settlement offer within policy limits, it will be liable for the entire judgment against the insured, including the amount in excess of policy limits (Sherrill v. Farmers Ins. Exchange, 374 P.3d 723 (2016).

The New Mexico Supreme Court has held that even where an insurer’s investigation was both competent and timely, the insurer is nevertheless liable for bad faith when its refusal to settle within policy limits is based on a dishonest judgment (Sloan v. State Farm Mut. Auto. Ins. Co., 135 N.M. 106 (2004). It is the insurer’s failure to treat the insured honestly and in good faith, giving equal consideration to its own interests and the interests of the insured, that renders the insurer liable for insurance bad faith (Sloan v. State Farm Mut. Auto. Ins. Co., 135 N.M. 106 (2004). Punitive damages may be awarded against an insurer in a bad faith case when the insurer’s conduct was in reckless disregard for the interests of the plaintiff, was based on a dishonest judgment, or was otherwise malicious, willful, or wanton (Sloan v. State Farm Mut. Auto. Ins. Co., 135 N.M. 106 (2004).

New Mexico courts have established that bad faith claims may be based on conduct other than a refusal to pay (Haygood v. United Services Automobile Association, 453 P.3d 1235 (2019). Evidence of an excessive or unnecessarily invasive claim investigation, for example, might give rise to a claim of bad faith investigation regardless of the ultimate coverage determination (Haygood v. United Services Automobile Association, 453 P.3d 1235 (2019). Under the New Mexico Uniform Jury Instructions, an insurer acts in bad faith when it refuses to pay a claim for reasons that are frivolous or unfounded and are not reasonable under the terms of the policy, or when it fails to conduct a fair investigation or fair evaluation of a claim (NMRA, Civ. UJI 13-1702). Notably, an insurer may act in bad faith in its handling of a claim even if the policy provides no coverage for that claim (NMRA, Civ. UJI 13-1702).

Under a bad faith claim, what is customarily done by those engaged in the insurance industry is evidence of whether the insurance company acted in good faith; however, the good faith of the insurance company is determined by the reasonableness of its conduct, whether such conduct is customary in the industry or not, and industry standards are evidence of good or bad faith but are not conclusive (American Nat. Property and Cas. Co. v. Cleveland, 293 P.3d 954 (2012).

In summary, New Mexico bad faith law encompasses a broad range of insurer misconduct — from dishonest settlement decisions and unreasonable claim denials to invasive investigations and failure to explain coverage denials — all measured against a standard of honest, fair, and reasonable conduct toward the insured.

Bad faith in the insurance context primarily refers to an insurer’s wrongful refusal to pay or unreasonable delay in settling claims, often breaching the implied covenant of good faith and fair dealing. Examples of bad faith include an insurer denying a claim without reasonable justification, unreasonably delaying payment without a valid reason, failing to reasonably investigate or evaluate claims, and using unconscionable tactics in claims handling. Insurers are permitted to contest claims on debatable legal or factual grounds, and reasonable delays or denials based on legitimate policy interpretations do not constitute bad faith. However, pursuing defense or denial without substantial basis, or forcing arbitration despite lacking grounds to reject a claim, would reflect bad faith conduct. Reliance on expert opinions is defensible unless it is shown the insurer knew or should have known the expert’s opinions were unreliable. Bad faith may also be inferred from the insurer’s conduct during litigation, though this is jurisdiction-dependent. Punitive damages may be available if the insurer acts willfully or with reckless disregard of the insured’s rights. Overall, bad faith claims focus on the insurer’s conduct in the processing of the claim rather than mere denial itself, requiring evidence such as failure to properly investigate or malicious motives.

Bad faith may also arise when an insured litigates in bad faith, such as by pursuing frivolous claims or causing unnecessary litigation costs. Courts consider conduct that is reckless, malicious, or baseless as reflecting bad faith. In such cases, prevailing defendants may recover attorney’s fees. The standard includes subjective and objective components, examining whether claims lack any factual or legal basis or are motivated by improper reasons like harassment or delay (7 Emp. Coord. Employment Practices § 77:30). Although these principles do not reflect specific New Mexico statutes, they reveal general understandings of bad faith conduct in insurance and litigation contexts applicable across jurisdictions.