Court: District Court, D. New Mexico; September 11, 2015; Federal District Court
Robert Sinclair's motion to amend his Complaint to include claims of bad faith and unfair insurance practices against Zurich American Insurance Company, alongside his existing breach of contract claim, has been denied. Zurich opposed the amendment, citing untimeliness and futility. The court noted that under Federal Rule of Civil Procedure 15(a), amendments are allowed with court permission or opposing party consent after a responsive pleading; however, they may be denied due to undue delay, prejudice, bad faith, or futility. The Tenth Circuit has established that untimeliness alone can justify denying leave to amend if no adequate explanation for the delay is provided. Moreover, an amendment is deemed futile if the revised complaint would be subject to dismissal.
The court highlighted the plausibility standard from the Twombly/Iqbal decisions, which requires that complaints contain sufficient factual allegations to suggest a plausible claim for relief. Legal conclusions, bare assertions, or formulaic recitations of claims do not meet this standard. To establish a bad faith claim, Sinclair must demonstrate that Zurich’s reasons for denying his claim were frivolous or unfounded, meaning they lacked any legitimate basis or support in the policy or claim circumstances. The terms 'frivolous or unfounded' are defined as an arbitrary refusal to pay, not merely an erroneous decision.
An insurance company can deny a claim without facing a bad faith lawsuit if it has reasonable grounds for the denial. Relevant case law establishes that insurers must attempt to settle claims in good faith when liability is clear, as outlined in the Unfair Insurance Practices Act (N.M. STAT. ANN. 59A-16-20 et seq.). This Act allows legal action for parties harmed by specific unfair practices. Sinclair seeks to amend his complaint against Zurich, alleging violations of this Act, but his claims lack sufficient factual support for allegations of bad faith or statutory violations. He states that Zurich denied his underinsured motorist (UIM) benefits, citing an exclusion in the policy, and claims that Zurich failed to provide a complete policy copy or respond promptly to his inquiries. Although he asserts Zurich misrepresented facts and failed to investigate his claim adequately, these allegations are primarily conclusory and fail to meet the necessary legal standards for a bad faith claim. Additional factual context reveals that Sinclair filed his UIM claim on October 31, 2013, received a settlement offer from the tortfeasor's insurer on November 1, and that Zurich denied the claim on November 4, 2013, due to a rejection of UIM coverage by Sinclair’s employer. Zurich later permitted Sinclair to accept the settlement offer on December 20, 2013. Overall, Sinclair's proposed amendments do not convincingly demonstrate Zurich's bad faith or violations of the Unfair Insurance Practices Act.
Sinclair claims he repeatedly sought a certified copy of Zurich’s insurance policy, receiving only the New Mexico portion on February 14, 2014. Following Sinclair's lawsuit on May 4, 2014, Zurich provided the full policy during initial disclosures and responded to requests for admissions. Sinclair contests Zurich’s motion for summary judgment, which asserted that SAIA had validly rejected Underinsured Motorist (UIM) coverage under New Mexico law. He alleges that Zurich misrepresented and failed to disclose relevant New Mexico case law in its arguments, indicating litigation misconduct and bad faith.
The court noted Zurich's counsel neglected controlling case law in its summary judgment motion. New Mexico has not yet ruled on whether an insurer's litigation conduct can be evidence of bad faith, although the concept has been explored in various cases and literature. The court believes New Mexico would uphold that an insurer's duty of good faith persists despite the adversarial nature of litigation once a suit is filed. It would also recognize the insurer's obligation to reassess coverage decisions based on new information received post-suit. Furthermore, bad faith can encompass actions occurring after a complaint is filed, possibly reflecting ongoing issues. While insurers can face liability under the Unfair Insurance Practices Act for actions post-lawsuit, only insurers and their agents are liable, excluding attorneys from such actions.
Stricter standards apply when plaintiffs seek to use attorney conduct during litigation as evidence of bad faith against insurers, who have a right to competent representation. Jurors may struggle to assess normal litigation tactics, and allowing such conduct as bad faith evidence could hinder an insurer's ability to challenge dubious claims. Litigation strategies are generally not pertinent to the insurer's prior decisions on coverage denial. The Federal Rules of Civil Procedure and professional conduct rules govern litigation practices, with significant sanctions available for misconduct. Some jurisdictions prohibit introducing attorneys' litigation actions as proof of bad faith, but New Mexico likely aligns with the majority view, permitting such evidence only in rare, extraordinary circumstances. Courts must balance the probative value of this evidence against potential unfair prejudice and confusion for juries. The case at hand does not meet the threshold for extraordinary facts warranting the introduction of Zurich’s summary judgment motion as bad faith evidence. New Mexico's evolving case law regarding Underinsured Motorist (UIM) coverage complicates matters, as the state’s Supreme Court has frequently altered requirements, particularly concerning valid UIM coverage waivers.
Sinclair has not previously claimed that Zurich acted in bad faith regarding his UIM coverage claim. He did not allege bad faith upon Zurich's denial of coverage and agreed to bifurcate the coverage issue from damages, prioritizing its resolution. Despite filing multiple briefs on summary judgment motions, Sinclair did not assert bad faith in any of them. He suggested certifying the coverage issue to the New Mexico Supreme Court, referencing inconsistencies between two court decisions but did not seek sanctions against Zurich for its arguments. While acknowledging poor judgment by Zurich’s attorneys in their presentation, the court determined that such conduct should be addressed under existing procedural rules rather than as evidence of bad faith or violations of the Unfair Insurance Practices Act. The court deemed any potential evidence of bad faith to be outweighed by the risk of unfair prejudice and confusion for the jury, leading to the conclusion that Sinclair's claims were not plausible. Consequently, Sinclair’s motion to amend his complaint was denied. The court noted that modifications to the scheduling order are governed by Rule 16(b)(4), requiring a showing of good cause, but chose to analyze the matter under Rule 15 standards instead, as the parties had not discussed Rule 16’s applicability.
