New Mexico recognizes both common law and statutory bad faith claims against insurers, with distinct frameworks governing first-party and third-party claims. The state’s Insurance Code prohibits unfair claims practices, and courts have developed a robust body of case law defining the standards insurers must meet when handling claims.
The primary statutory prohibition on bad faith claims handling is found in N.M. Stat. Ann. § 59A-16-20, which defines and prohibits unfair claims practices. Under that statute, any of the following practices, knowingly committed or performed with such frequency as to indicate a general business practice, are defined as unfair and deceptive and are prohibited: failing to adopt and implement reasonable standards for the prompt investigation and processing of insureds’ claims, and not attempting in good faith to effectuate prompt, fair and equitable settlements of an insured’s claims in which liability has become reasonably clear. Persons injured by unfair claims practices under Article 16 of the Insurance Code are entitled to recover actual damages, supplemented when appropriate by costs and attorneys’ fees.
New Mexico does not adhere to a single definition of bad faith in the context of insurance matters. For liability insurers, a court may find bad faith when the insurer refuses to settle after being asked to do so while at the same time demonstrating disregard for the interests of its insured. To recover for a liability insurer’s bad faith failure to settle, an insured must show that the insurer’s refusal to settle was based on a dishonest judgment — that is, a failure to honestly and fairly balance its own interests and the interests of the insured. If a liability insurer fails to meet basic standards of competency in investigating a claim or researching the applicable law, such conduct is strong evidence of bad faith, but is not in itself sufficient to support a claim for bad faith failure to settle. If an insurer’s decision not to settle is made in bad faith, the insurer may be held liable for the judgment against its insured in excess of policy limits.
New Mexico’s Uniform Jury Instructions confirm that when deciding whether to pay a claim, an insurer must act fairly, reasonably, honestly, and in good faith under the circumstances. An insurer may establish bad faith in a variety of ways — whether by proving the insurer failed to deal fairly in handling the claim, failed to conduct a fair investigation, or failed to fairly evaluate coverage, among other possibilities. Notably, an insurer may act in bad faith in its handling of a claim even if the policy provides no coverage for that claim.
New Mexico does not recognize a common law cause of action by a third party for bad faith. However, the New Mexico Supreme Court recognized a statutory bad faith cause of action by third-party claimants against compulsory automobile liability insurance carriers for failure to settle an underlying lawsuit, grounded in the Insurance Code’s requirement that insurers not, without just cause, fail to pay or delay payment of claims in favor of a third person with respect to the liability of an insured. This statutory third-party right of action has not been extended to carriers providing non mandatory excess liability insurance coverage.
Punitive damages are available in common law bad faith actions but do not apply to statutory violations of Article 16 of the Insurance Code. The availability of punitive damages in common law bad faith cases reflects the heightened reprehensibility of an insurer’s dishonest judgment in refusing to settle within policy limits.
In summary, New Mexico imposes meaningful obligations on insurers through both statute and common law, requiring honest, fair, and prompt claims handling, with significant consequences — including excess judgment liability and punitive damages — for insurers that act in bad faith.
Bad faith claims handling in insurance arises primarily where insurers fail to act in good faith in evaluating, investigating, adjusting, and settling claims. This can pertain to first-party claims, where an insurer wrongfully refuses or delays payment to its insured, or third-party claims involving refusal to settle a liability claim within policy limits, exposing the insured to excess judgments. The duty of good faith arises by implication when the insurer assumes control of settlement negotiations and requires balancing interests between the insurer and insured, with liability possible if the insurer acts dishonestly or fails to diligently investigate and negotiate settlements. The duty exists regardless of whether a lawsuit has been filed but becomes operative once a third party demands settlement within policy limits and potential liability exceeds those limits.
Statutes based on the NAIC Model Unfair Claims Settlement Practices Act influence bad faith liability in many states, though New Mexico-specific statutes were not included. Bad faith claims require proof the insurer withheld benefits unreasonably or failed to investigate or settle claims diligently. Courts analyze such conduct under the totality of circumstances, with potential recovery including compensatory and punitive damages for willful misconduct or statutory violations. Claims handling manuals, insurer communications, and the insurer’s responsiveness can be critical evidence in assessing bad faith. The duty to settle also encompasses the insurer’s obligation to promptly evaluate liability and engage in settlement negotiations consistent with fair dealing.