b. The Statutory Offset Rule
In Schmick, the Supreme Court determined that the New Mexico Legislature intended to “put an injured insured in the same position he would have been in had the tortfeasor had liability coverage in an amount equal to the uninsured/underinsured motorist protection purchased for the insured’s benefit.”[17] The Schmick Court noted that “the underinsurance coverage . . . [is] not in addition to that provided by the other vehicle but [is] intended to supplement the amount paid by the underinsured motorist so that the insured recover[s] an amount equal to the uninsured motorist protection purchased.”[18] Consistent with this legislative intent, the Schmick Court determined that, “under a statute like ours, where the most an insured can receive is the amount of underinsurance purchased for [the insured’s] benefit, that amount must be offset by available liability proceeds.”[19]
Pursuant to this offset rule, UIM benefits are calculated by subtracting the amount of the insured’s UM coverage from the amount of the tortfeasor’s liability coverage.[20] The Crutcher majority noted that a significant consequence of this rule is that, if injured persons purchased only the statutory minimum policy, that person’s policy will not cover losses for damages in excess of $25,000.[21] The majority stated that the collection of UIM insurance is, therefore, practically impossible for minimally insured motorists.[22]
It is worth noting, and the majority of the Court acknowledged, that Mr. Crutcher’s claim was not denied based on the statutory offset rule.[23] The insurer denied Mr. Crutcher’s claim based on a determination that the tortfeasor did not meet the definition of an uninsured motorist pursuant to the statute, because the total limits of liability insurance were equal to Mr. Crutcher’s UM/UIM coverage limits.[24] Even though the denial of Mr. Crutcher’s claim was not based on the offset rule, the insurer agreed that the application of the offset rule would have resulted in no UIM payment.[25]
c. Majority’s Holding of Illusory Coverage
The Supreme Court in Crutcher noted that it has long held the “courts of New Mexico assume the average purchaser of automobile insurance will have limited knowledge of insurance law, and we will not impose on the consumer an expectation that she or he will be able to make an informed decision as to the amount of UM/UIM coverage desired or required without first receiving information from the insurance company.”[26] The Court perpetuated this view of the law and plainly stated that “[w]e refuse to impose on the insured the obligation to be aware of and understand the consequences of New Mexico’s UM/UIM statutory provisions, much less the offset rule derived by its technical language.”[27]
The Court’s majority then struggled with two concurrent facts, specifically that policyholders with minimum limits UM/UIM coverage will receive benefits if injured by a tortfeasor without insurance, and those same policyholders may receive no benefits in some UIM circumstances. The majority stated that the fact that insured will receive some benefit from minimum limit UM/UIM policies only demonstrates that insurers are properly disclosing that the policy covers half of the risk purportedly covered by a minimum limits UM/UIM policy.[28] The majority was persuaded by Mr. Crutcher’s argument that the minimum limits UM/UIM coverage is illusory, because it was misleading to the average insurance purchaser.[29] The majority grudgingly acknowledged that the UM/UIM coverage was not illusory based on its definition, but it then agreed with Mr. Crutcher that minimum UM/UIM coverage is misleading because policyholders are not adequately informed that they are not eligible to receive UIM coverage.[30]
The Court noted that the New Mexico Legislature has purposefully chosen to adopt a gap theory of underinsurance coverage, and the Court stated that New Mexico lawmakers are empowered to revisit the state’s UM/UIM coverage statutory scheme in light of the issues considered in Crutcher.[31] The Court found itself bound by the language chosen by the New Mexico Legislature.[32] Importantly, the Court’s review of the applicable statutory language made clear that the sale of UM/UIM insurance is reflective of the statutory scheme purposefully selected by the New Mexico Legislature.[33] The Court agreed that the law allows an insurer to sell minimum limits UM/UIM coverage to a policyholder and only provide coverage for UM and that law allows insurers to charge a premium for such coverage as long as they make a proper disclosure to the policyholder.[34]
The Court held that in order to fulfill the UM/UIM statute’s legislative purpose of placing the burden on the policyholders to determine how much protection they would like to purchase, the policyholders must be fully informed of the relative benefits and limitations of a given policy.[35] The Court held that insurers must explicitly disclose to policyholders the potential outcome where the policyholder is not eligible to receive UIM coverage pursuant to the Mandatory Financial Accountability Act and the corresponding offset rule articulated in Schmick.[36] The Court held that the insurer shall bear this burden of disclosure to the policyholder that a purchase of the minimum limits UM/UIM coverage may come with the counterintuitive exclusion of UIM coverage if the insured is concerned about the potential of being in an accident with a tortfeasor who carries minimum limits liability insurance.[37] This burden of disclosure creates complexity for both insureds and insurers, because it is impossible to predict the level of liability coverage carried by future tortfeasors. The Court stated that without this disclosure, an insurer may not charge a premium for minimum UIM coverage.[38]
d. The Dissent in Crutcher
The decision in Crutcher was not unanimous, and the opinion contains a well-reasoned dissent. The dissent views the majority’s holding as resting on two flawed premises, and the dissent states that the disclosure mandated of insurance companies was incorrect and likely to generate confusion.[39]
According to the dissent, the first flawed premise was the majority’s view that insureds expect UIM coverage to be make-whole coverage (i.e., excess theory coverage).[40] The dissent noted that UIM coverage in New Mexico has never been so defined. The statutory law in New Mexico instead provides for “gap theory” coverage that compensates an injured insured up to the amount of UM/UIM coverage purchased and not up to the amount of the injured insured’s damages.[41]
The second flawed premise according to the dissent was the premise that New Mexico’s UM/UIM statute never, in practice, provides UIM benefits to insureds with minimum-limits policies.[42] The dissent stated that this assertion was inaccurate. It then noted specific examples where an insured with minimum UM/UIM coverage may receive benefits from the coverage (e.g. where either an insured has minimum limits UM/UIM coverage on multiple vehicles or an insured has multiple minimum limits UM/UIM policies available and that insured is allowed to stack coverages and recover UIM benefits).[43] The dissent noted that the insured in Schmick stacked two minimum-limits policies and received UIM benefits as a result.[44] The dissent also noted that an accident involving multiple claimants may also entitle a claimant with minimum-limits coverage to recover UIM benefits if the liability coverage of the tortfeasor is inadequate to cover multiple claims at minimum limits.[45]
Finally, the dissent stated that burdening insurance companies with a disclosure about the effect of a coverage that is already defined, consistent with the law, in the insurance contract is a substantial departure from prior holdings.[46] The dissent saw no basis in the law for the imposition of such a requirement and stated reservations that the majority’s holding will not meaningfully aid insureds in understanding and selecting among coverage options.[47]
III. Retroactive Application of Crutcher
More recently, in Smith v. Interinsurance Exchange of the Automobile Club, the New Mexico Supreme Court considered the single question of whether the rule announced in Crutcher applies prospectively or retroactively.[48] The Court held that Crutcher applies retroactively.[49] The Court stated that there is a rebuttable presumption that a rule announced in a New Mexico civil case, such as Crutcher, applies retroactively.[50] The Court held that the presumption was not overcome, because the Court did not expressly declare in Crutcher that the rule applied prospectively, and Crutcher did not state a new rule of law such that the insurer was entitled to rely on pre-Crutcher authority.[51] The Court stated that its intention was for Crutcher to apply retroactively.[52]
IV. Conclusion
With the decisions in Crutcher and Smith, the landscape in New Mexico for property and casualty insurers providing minimum limits UM/UIM coverage became incrementally more complex. Insurers are on notice that minimum limits UM/UIM coverage, which is popular level of coverage for insurance purchasers, is considered by the New Mexico Supreme Court to contain some coverage components that are illusory. In order to sell minimum limits UM/UIM coverage, these insurers bear the burden of disclosure to the policyholder that the purchase of the minimum limits UM/UIM coverage may result in no coverage, if the insured is in an accident with a tortfeasor who carries minimum liability insurance. As the dissent notes, these recent pronouncements and disclosure requirements may result in more confusion than meaningful understanding by policyholders.