New Mexico Supreme Court Holds Actual Notice from Any Source is Sufficient to Trigger Defense Obligation
In what can only be called a significant turn around, the New Mexico high court recently overruled twenty-four years of precedent when it announced that actual notice from any source to a liability insurer of a lawsuit against its insured could trigger the duty to defend, even when the insured failed to provide notice of the suit or ask for a defense. In proving the old adage "bad facts make bad law," the New Mexico Supreme Court ruled notice of a liability claim against the insured could come from any source and the insured's failure to demand a defense didn't excuse the insurer from defending covered claims.
In Garcia v. Underwriters at Lloyd’s, London, --- P.3d ----, 2008 WL 943502 (N.M. 2008), the counsel for the plaintiffs, wrongful-death beneficiaries, provided the insurer with a copy of the filings in a related probate proceedings. The insurer issued a reservation of rights letter and Lloyd’s New York counsel responded to the probate administrator and provided guidance to Lloyd’s as to how to proceed under New Mexico law. Despite the probate administrator’s request to participate in the probate proceeding, Lloyd’s followed its New York counsel’s advice and did not participate. The court entered a $3 million judgment for plaintiffs and the probate administrator assigned all claims against Lloyd’s to the plaintiffs. The plaintiffs then sued Lloyd’s for breach of contract, bad faith, and violations of the New Mexico Insurance Code and Unfair Practices Act.
Lloyd’s won a summary judgment at the trial court based on the existing rule (at the time) that an actual demand for a defense must be made by the insured to his liability insurer in order to trigger the duty to defend. On appeal, the New Mexico high court found the “interests of fairness” favored placing the burden on the insurer once it had actual notice to inquire if its insured desired a defense. While the New Mexico court noted their was a split among the states as to whether notice must come from the insured, it found that Lloyd’s offered no compelling reason that it should not allow actual notice “from any source” to suffice. The New Mexico court thus reversed the summary judgment for Lloyd’s and held the new rule applied because Lloyd’s did not affirmatively rely on the lack of a demand when it made its decision not to defend its insured. It determined that Lloyd’s instead relied on incorrect advice from its New York counsel that Lloyds did not need to participate in the probate proceeding. The court pointed out Lloyd’s use of New York counsel seven times in its opinion raising questions as to whether the court was motivated more by "fairness" or it's apparently dislike of New York lawyers giving bad advice as to New Mexico law.
