NMSC Imposes New Disclosure Requirements on Car Insurance

In Crutcher v. Liberty Mutual Insurance Company, the New Mexico Supreme Court answered a pair of questions certified to it from the Tenth Circuit: is underinsured motorist coverage on a minimum limits policy illusory and, if so, may an insurance company charge for it? Concluding that the practice was legal but deceptive, the Court created a new requirement for insurers to “disclose the limitations of minimum limits UM/UIM policies.”

Facts

In 2006, Mr. Crutcher obtained a car insurance policy providing the statutory minimum coverage allowed in New Mexico: $25,000 per person and $50,000 per occurrence. Every month for twelve years, Mr. Crutcher paid two premiums: one for liability insurance and one for uninsured/underinsured motorist (UM/UIM) coverage.

In 2017, Mr. Crutcher was involved in a car accident when another driver (tortfeaser) failed to stop at a traffic signal and crashed into his car. As a result of the collision, Mr. Crutcher sustained injuries, including a broken collarbone. Like Mr. Crutcher, the tortfeasor had purchased only a minimum limits automobile insurance policy. That is, he carried auto liability insurance of $25,000 per person and $50,000 per occurrence. The damages resulting from Mr. Crutcher’s injuries exceeded $50,000.

Following the accident, Mr. Crutcher filed a claim with the tortfeasor’s insurance company, USAA. In response to his claim, USAA paid Mr. Crutcher $25,000, or the full amount of the tortfeasor’s liability policy which covered some of the expenses incurred by the accident. After receiving the $25,000 liability coverage limit from the tortfeasor’s insurance company, Mr. Crutcher filed a claim with his own insurance company, Safeco, assuming he would receive at least $25,000 through his uninsured/underinsured motorist benefits to recover the balance of his damages. However, Safeco denied the claim, giving rise to this dispute.

UM/UIM Law

The Mandatory Financial Responsibility Act requires all motorists to carry minimum insurance liability limits of $25,000 per person, $50,000 per occurrence. In addition, unless they rejected UM/UIM insurance in writing, motorists are required to carry UM/UIM insurance of at least the same amount. In this case, Mr. Crutcher did not reject UM/UIM coverage, so he had the statutory minimum amount of UM/UIM coverage. It was this coverage that led Mr. Crutcher to expect he could recover an additional $25,000 from his UM/UIM policy.

In computing UM/UIM benefits, New Mexico applies what is known as the “offset rule.” Pursuant to the offset rule, underinsured motorist benefits are calculated by subtracting the amount of the tortfeasor’s liability coverage from the amount of the insured’s uninsured motorist coverage. As the Court observed, this creates a problem when both parties have the statutory minimum of $25,000 in coverage:

A significant consequence of this rule is that, if injured persons purchased only the statutory minimum policy, the person’s policy will not cover losses for damages in excess of $25,000. Collection of UIM insurance is therefore practically impossible for minimally insured motorists, and collection is not possible in Mr. Crutcher’s case. … This impossibility was identified and highlighted by this Court in Weed Warrior where it was determined that, “[i]f the tortfeasor carried the statutory minimum of liability insurance and the injured driver carried the statutory minimum of UM/UIM coverage, the injured driver would have no recourse for injuries suffered over the minimum amount of $25,000.” Stated differently, there will never be an instance in which there is an “underinsured motorist” if both parties in a car accident are minimally insured because the minimum limits, both being $25,000/$50,000, will always cancel each other out. Consequently, “[t]he injured driver, though in theory having purchased UIM coverage, would in fact have purchased only UM coverage—rendering the inclusion of ‘UIM’ in the statute superfluous.” 

Crutcher, ¶¶ 20-21.

This was exactly the situation Mr. Crutcher found himself in. Because he had $25,000 in UM/UIM coverage and the tortfeasor had $25,000 in liability insurance, the two cancelled out, leaving Mr. Crutcher with no UIM coverage.

The Problem of Illusory Coverage

With the above in mind, the Court turned to the question of whether minimum limits UM/UIM coverage is “illusory” or “deceptive.” Mr. Crutcher argued that he was deceived because he reasonably believed that the coverage was more than it was. His insurers responded that (1) the policy was not illusory because it complied with the statute, and (2) the policy provided value because it included UM coverage, which would protected Mr. Crutcher against hypothetical collisions with uninsured motorists.

The court quickly rejected the first argument (that the statute immunized the insurer). New Mexico cases have long recognized that insureds are have limited knowledge of insurance law, and, as a result, have refused to require an insured to understand the consequences of the statutes or more esoteric legal concepts such as the offset rule. Accordingly, the Court was unwilling to agree that the policies were not deceptive because a sophisticated reader (basically, an insurance lawyer) would have recognized that the coverage cancels out in cases like this.

As to the second argument, the court acknowledged that the insurer’s disclosures were accurate as to UM coverage. But UM coverage is only half of the UM/UIM policy. Accordingly, the Court reasoned that while the policy did provide value, the UIM portion of the coverage was still illusory and/or misleading. The fact that it was misleading did not, however, mean that it was not permitted–under the language of the statute, the result (i.e., no coverage in this situation) was lawful and correct. While more equitable solutions are possible, it is up to the legislature to implement them by changing the statute.

The Court’s Solution

Having concluded that minimum limits UM/UIM policies are lawful yet potentially deceptive, the Court remained concerned that many insureds would continue to be deceived by this type of policy into reasonably believing that they had more coverage than they had actually purchased. This would cut against New Mexico’s strong policy of ensuring that motorists were fully informed of their coverage decisions.

To address this problem, the Court crafted a new rule: insurers must disclose the possibility that there may be no UIM coverage in collisions between minimally insured drivers. This, the Court explained, would allow insureds to make fully informed decisions when selecting UM/UIM coverage. The opinion was silent as to the consequences of failing to make the disclosure, and somewhat ambiguous as to whether the new rule applied retroactively (as is usual when a new rule is announced) or only prospectively (which a court must state explicitly).

The Dissent

Justice Nakamura, sitting by designation, wrote in dissent. Justice Nakamura disagreed for two reasons. First, she could not agree that offering UM/UIM coverage in compliance with the statutes and case law was deceptive. In her view, this could only be the case if the expectations of insureds in New Mexico were at odds with decades of established law. Second, the she disagreed with the majority’s premise that there is never UM/UIM coverage when both parties are minimally insured. Citing prior cases, including the very case that created the offset rule, she gave examples of fact patterns where a minimally insured driver received UIM coverage.

What Does It Mean?

Going forward, insurers will need to craft disclosures to comply with Crutcher. On the other side, drivers will try to leverage the lack of disclosures in current policies or may take issue with the new disclosure language that insurers draft. The courts will likely need to clarify whether this opinion applies retroactively. In addition, the opinion seems to suggest that an insurer that complies completely with state law might nonetheless be liable for deceptive conduct, perhaps under statutes such as New Mexico’s Unfair Trade Practices Act. It seems likely that we will not know the full effect of this case for several years.

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