This summary was computer-generated without any editorial revision. It is not official, has not been checked for accuracy, and is NOT citable.
Facts
A car accident occurred on August 3, 1989, when a driver, impaired by a blood alcohol level of .21, swerved into oncoming traffic, causing a collision that resulted in his death, the deaths of two others, and severe injuries to a minor child. The driver was insured under a Dairyland Insurance policy with liability limits of $25,000 per person and $50,000 per occurrence, which were insufficient to cover the damages. The injured child’s medical expenses were paid by a health insurer, Health-Plus, which sought subrogation rights to recover its payments (paras 2-4).
Procedural History
- Herman v. Johnstone, No. CV-90-01295 (N.M. Dist. Ct. Dec. 4, 1991): The court awarded $2,725,000 to the estate of one victim and $275,000 to the injured child and his father jointly (para 8).
- Herman v. Johnstone, No. CV-90-01295 (N.M. Dist. Ct. Jan. 21, 1992): Judgment was entered with interest at 15% annually (para 8).
- Federal District Court, July 1, 1993: Dairyland was granted summary judgment on its declaratory action and on Herman’s bad-faith counterclaim (para 10).
- Federal District Court, July 11, 1995: Dairyland’s counterclaim against Herman was dismissed with prejudice (para 10).
Parties' Submissions
- Appellant (Herman): Argued that Dairyland acted in bad faith by refusing to settle within policy limits without requiring a release of subrogation claims, which would have left him with no recovery. He contended that Dairyland failed to prioritize its insured’s interests and should have settled to minimize liability (paras 7, 25-27).
- Appellee (Dairyland): Claimed that it acted in good faith by requiring a release of all claims, including subrogation claims, to protect its insured from potential out-of-pocket liability. It argued that accepting a settlement without such a release would have breached its duty to its insured (paras 16-20).
Legal Issues
- Did Dairyland satisfy its duty to treat its interests and the interests of its insured equally by requiring a release of all claims, including subrogation claims, as a condition for settlement when there was a substantial likelihood of recovery exceeding policy limits?
Disposition
- The New Mexico Supreme Court answered the certified question in the negative, holding that Dairyland did not satisfy its duty to its insured as a matter of law under the circumstances (para 1).
Reasons
Per Franchini CJ (Baca and Minzner JJ. concurring):
The Court emphasized that insurers owe a duty of good faith and fair dealing to their insureds, requiring equal consideration of the insured’s interests. When there is a substantial likelihood of recovery exceeding policy limits, the insurer must act as though it alone is liable for the entire judgment. Dairyland’s insistence on a release of subrogation claims, which could have left the claimant with no recovery, was not necessarily in good faith. The Court distinguished this case from others, such as Coe v. State Farm, where statutory requirements mandated the inclusion of certain claims in settlements. Here, no such statutory obligation existed, and Dairyland’s refusal to settle could be interpreted as prioritizing its own interests over those of its insured. The Court concluded that factual issues regarding Dairyland’s conduct precluded summary judgment and required resolution at trial (paras 12-30).