Under New Mexico law, an insurance company is not automatically required to offer a settlement, but it has a duty of good faith that may compel it to settle when liability is reasonably clear and a reasonable offer within policy limits is made. Failure to honor this duty can expose the insurer to liability well beyond its policy limits.

New Mexico’s Insurance Code expressly prohibits certain settlement-related conduct. Under N.M. Stat. Ann. § 59A-16-20, unfair and deceptive claims practices 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. The statute also prohibits 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, and failing to promptly provide an insured a reasonable explanation of the basis relied on in the policy for denial of a claim or for the offer of a compromise settlement. These prohibitions apply when such conduct is knowingly committed or performed with such frequency as to indicate a general business practice.

Beyond the statute, New Mexico courts have long recognized a common law duty of good faith in settlement decisions. The New Mexico Supreme Court held in Dairyland Insurance Co. v. Herman that when a claimant makes a firm reasonable offer to settle an excess claim within insurance policy limits, the implied covenant of good faith and fair dealing may require the insurer to settle. 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.

The duty to settle is not absolute, and an insurer that acts in good faith will not be penalized for declining to settle. 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 — meaning a failure to honestly and fairly balance its own interests and the interests of the insured. New Mexico does not recognize a cause of action for negligent failure to settle; the standard requires bad faith, not mere negligence.

Importantly, the duty to settle runs to the insured, not to injured third parties. A liability insurer is subject to a duty of good faith in determining whether to settle a claim against the insured; however, the duty to settle is related to the duty to defend and is imposed to protect the insured, not the injured third party. New Mexico courts have recognized, however, that statutory provisions impose upon insurance companies a duty to deal fairly with third-party claimants in their efforts to settle, and the Superintendent of Insurance may suspend or revoke an insurer’s certificate of authority if the insurer, as a general business practice, without just cause compels insureds or claimants to accept less than the amount due them or to employ an attorney or bring suit to secure full payment or settlement of a claim.

New Mexico’s Uniform Jury Instructions confirm that an insurer must act in good faith in determining whether to settle a claim against its insured and must settle a claim against its insured when practicable. In deciding whether to settle, an insurer must exercise honest, informed judgment and fairly balance its own interests and the interests of the insured, and an insurer that fails to do so acts in bad faith. When there is a substantial likelihood that a claim will result in a recovery that exceeds policy limits, the insurer has a good-faith duty to minimize, if not eliminate, its insured’s liability.

Any person who has suffered damages as a result of a violation of Chapter 59A, Article 16 NMSA 1978 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 if the party charged with the violation willfully engaged in the violation.

In summary, while New Mexico law does not guarantee that an insurer will offer a settlement in every case, it imposes a robust good-faith duty requiring insurers to seriously consider and pursue reasonable settlements when liability is clear, backed by both statutory prohibitions and common law bad faith liability that can far exceed the original policy limits.

An insurance company’s obligation to offer settlement in third-party liability claims arises from the implied covenant of good faith and fair dealing, and includes the duty to evaluate and negotiate claims reasonably within policy limits to protect the insured from excess judgments. The insurer controls the defense and settlement process, and failure to settle within policy limits when reasonable can lead to liability for damages beyond those limits. Courts generally hold that the duty to settle is triggered when the insurer is presented with a demand or an opportunity to settle within policy limits, particularly when liability is clear and damages likely to exceed those limits. However, nuances exist such as the insurer not being bound by settlement offers or reserves that represent mere proposals or estimates, and partial payments prior to total settlements are uncommon. While negligence may not always constitute bad faith, unreasonable delays, failure to investigate, or refusal to pay undisputed amounts can support bad faith claims, subject to jurisdictional standards. Moreover, the insured’s conduct in settlement negotiations and compliance with policy conditions can affect recovery against the insurer for bad faith refusal to settle. New Mexico law specifically recognizes improper claims settlement practices under the Unfair Insurance Practices Act, precluding summary judgment where facts about insurer’s conduct in claims handling create disputes.

Ultimately, insurers must weigh the insured’s exposure and claims against policy limits, acting in good faith to avoid excess liability. Evidence of failure to adequately quantify damages, refusal to initiate or diligently pursue settlement, or inducing insured to contribute to settlements may indicate bad faith. Conversely, courts acknowledge the insurer’s discretion in settlement authority and that settlement offers are compromises not admissions of liability. The obligation to settle is contextual, balancing insurer and insured interests, and varies by jurisdiction and claim facts.