Hinkle v. State Farm Fire & Casualty Co.

Citations: 4 N.M. 525; 2013 NMCA 084Docket: No. 34,232; Docket No. 31,707

Court: New Mexico Supreme Court; July 26, 2013; New Mexico; State Supreme Court

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The court examined whether the district court improperly granted summary judgment to an insurer in a case where the insurer was accused of failing to defend the insured in a third-party lawsuit. The relevant insurance policy included a duty to defend against lawsuits related to abuse of process or malicious prosecution. The court determined that the third-party complaint did not explicitly claim these torts or their current amalgamation, malicious abuse of process. It found that the underlying facts did not sufficiently support a claim for malicious abuse of process. Furthermore, the policy did not reasonably imply that the insurer had a duty to provide defense. Consequently, the court affirmed the district court's decision. 

The plaintiffs—Hinkle Income Properties, LLC, Gene E. Hinkle, and Betty Hinkle—sued State Farm Fire and Casualty Company and others for failing to defend them in an earlier state court action. They alleged breach of contract, negligence, bad faith, and violations of the New Mexico Unfair Practices Act. State Farm moved for summary judgment, asserting it had no duty to defend under the policies issued. The district court granted summary judgment to State Farm in September 2011, and to the other defendants in October 2011 and July 2012. The plaintiffs appealed State Farm's judgment, which stemmed from a lawsuit by Peterson Inv-Juan Tabo, LLC, regarding a commercial property development dispute. The Peterson complaint included various claims, alleging coercive tactics by Hinkle to extract additional concessions from Peterson after an agreement was made.

At the commencement of the Peterson litigation, State Farm insured Hinkle and Betty Hinkle with two policies, one being a “Personal Liability Umbrella Policy” that covered liability insurance and defense against specified claims, including those resulting in personal injury. This policy defined “personal injury” to include various offenses such as false arrest and defamation. The other policy, a “Homeowners Policy,” was not addressed in the appeal.

State Farm sought summary judgment, claiming it had no duty to defend or provide liability coverage under the Umbrella Policy. Plaintiffs contended that Hinkle's threats of litigation against Peterson constituted abuse of process, thereby triggering State Farm's duty to defend. They criticized State Farm's reliance on a “four corners” review of the Peterson complaint without a thorough investigation, asserting that a proper inquiry would have revealed facts warranting coverage. 

The district court acknowledged that an investigation might have disclosed Hinkle's threats but ruled that such threats did not constitute abuse of process or malicious prosecution under New Mexico law. On appeal, Plaintiffs argued that the district court erred by granting summary judgment, claiming they showed sufficient issues of fact regarding State Farm's denial of coverage based on a cursory review and Hinkle’s reasonable expectation of defense.

The standard of review for the appeal is de novo, focusing on whether there are genuine issues of material fact and whether the movant is entitled to judgment as a matter of law. The review considers the entire record, favoring the party opposing summary judgment unless no material facts are disputed.

State Farm's duty to defend Hinkle under the Policy is at issue, with plaintiffs asserting that a reasonable investigation would have uncovered Hinkle's alleged threats against Peterson to manipulate business outcomes. During the Peterson litigation, depositions indicated these threats, which plaintiffs argue should have prompted State Farm to defend Hinkle based on claims of abuse of process or malicious prosecution. New Mexico law establishes that an insurer's duty to defend can arise from facts outside the complaint and requires a reasonable investigation into the underlying circumstances of a claim. This was clarified in G.G. Services, Inc. v. Agora Syndicate, Inc., where it was noted that insurers must not solely rely on third-party pleadings but must consider all relevant facts that could implicate coverage. The district court accepted that reasonable investigation would reveal the basis of the Peterson litigation as Hinkle’s threats, and the central issue is whether these facts invoke State Farm’s duty to defend under the relevant Policy provisions. Historically, abuse of process and malicious prosecution are related torts in New Mexico designed to protect individuals from improper legal actions intended to cause harm.

In DeVaney, the New Mexico Supreme Court merged the torts of abuse of process and malicious prosecution into a unified cause of action termed malicious abuse of process. The elements for this claim initially included: 1) initiation of judicial proceedings by the defendant against the plaintiff; 2) improper use of process; 3) a primary motive to misuse the process for an illegitimate purpose; and 4) damages. However, in Durham, the Court overruled the requirement that the defendant must initiate proceedings against the plaintiff, modifying the elements to: 1) improper use of process in a judicial proceeding; 2) primary motive for illegitimate ends; and 3) damages. The Durham Court reversed a district court dismissal, finding sufficient allegations of malicious use of subpoenas during arbitration proceedings.

Applying the modified elements, the district court correctly concluded that State Farm had no duty to defend Hinkle under the Policy. The Peterson complaint did not assert a claim for malicious abuse of process or its predecessors but included claims for economic duress, breach of contract, and other torts. Plaintiffs did not argue that these claims fell under the Policy. Even assuming that Hinkle's threat of litigation aimed for economic advantage constituted a basis for the Peterson litigation, this was deemed insufficient for a malicious abuse of process claim. New Mexico law requires actual improper use of judicial process, and a mere threat of litigation does not meet this standard. Citing other jurisdictions, it was emphasized that the initiation of actual litigation, rather than just a threat, is necessary to establish such a claim. The plaintiffs’ allegations regarding threats to file an ethics complaint failed to meet the criteria for abuse of process, lacking any actual pursuit of improper legal action.

Plaintiffs argue that the district court erred in granting summary judgment by asserting that a material fact exists regarding Hinkle's reasonable expectation for State Farm to defend him in the Peterson litigation. They claim that the terms "abuse of process" and "malicious prosecution" are ambiguous for non-lawyers, and that the combination of these terms into "malicious abuse of process" further obfuscates their meaning in New Mexico courts. The doctrine of reasonable expectations applies when policy language might lead an insured to expect coverage; ambiguity in the policy also triggers this doctrine. The Policy defines "personal injury" with specific legal causes of action, indicating that Hinkle could not reasonably expect defense for claims not listed. An average consumer would interpret the Policy as covering only the defined offenses, and since the Peterson complaint did not assert claims for the torts at issue, the district court appropriately found the Policy unambiguous and lacking a duty for State Farm to defend. Plaintiffs' argument that the consolidation of torts into "malicious abuse of process" renders the Policy ambiguous is rejected, as the Peterson complaint did not make any claims for the relevant torts, making the complaint insufficient for coverage under the Policy.

The Policy's references to "abuse of process" and "malicious prosecution" are deemed unambiguous in relation to the Peterson complaint and its underlying facts. According to legal precedents, particularly Barth, laypersons’ expectations of insurance coverage arise from various factors beyond policy language. Plaintiffs cite two cases, Lunsford and St. Paul Fire, where courts found ambiguity in coverage for malicious prosecution, interpreting it as encompassing abuse of process. However, Lunsford represents a minority view, as most courts, including Parker Supply and Heil Co., have ruled that malicious prosecution as defined in insurance policies is clear. Under Wisconsin law, a lawsuit specifically for malicious prosecution is required to trigger an insurer’s duty to defend. Consequently, the Policy’s definition of personal injury linked to specific offenses does not extend coverage beyond those offenses. The district court's ruling that State Farm had no obligation to defend is affirmed.