In a surprising ruling, the New Mexico Supreme Court deemed that insurance companies were not permitted to charge a premium for minimal underinsured motorist coverage unless the insurer’s policy disclosed that the coverage was illusory.
In this case the insured purchased an auto policy which provided for minimum monetary limits for all coverages of $25,000 per person and $50,000 per accident for liability, uninsured motorist, and underinsured motorist coverages. The insured was injured in an automobile accident. The tortfeasor’s insurer, USAA, paid its $25,000 liability limits. Thereafter, the insured submitted a UIM claim to the insured’s carrier, Safeco, under the UIM provisions of that policy. Because the tortfeasor’s liability limits were equal to the UIM limits of the Safeco policy, Safeco determined that the tortfeasor was not underinsured by definition. The insured challenged this argument in court.
The insured argued that in circumstances where the tortfeasor carried minimum required liability limits of $25,000/$50,000, then a minimum limits UIM coverage would never provide benefits. This result was mandated by New Mexico law which was a “gap” or “offset” jurisdiction. Under New Mexico law, the tortfeasor’s limits are offset against the UIM policy limits, dollar‑for‑dollar. Thus, whenever a tortfeasor carried liability limits—which were required to be at least $25,000/$50,000—a minimum limits UIM coverage would never become applicable.
In Crutcher v. Liberty Mutual Insurance Co., 501 P.3d 433, 2021 WL 4520651, (N.M. 10/04/21), a majority of the New Mexico Supreme Court justices agreed with Crutcher’s argument. The majority of the Court agreed that the coverage appeared to be illusory, although Safeco’s policy did track the governing UIM statute, which mandated the minimum limits, defined “underinsured” and allowed an offset for the tortfeasor’s liability payments. The Court could not deem the statute illusory and, therefore, the Court ruled that insurers in New Mexico would not be permitted to charge a premium for a minimum-limits UIM coverage without disclosing that it provided no coverage at all. Of course, this was not entirely accurate because if the insured purchased more than minimum limits, then circumstances presented by Crutcher would not apply.
In a shocking observation, the Court noted that when the legislature permitted insurance companies to sell policies that conformed with the law, the legislature did not intend to confer “immunity” from claims that the insurer “misrepresented” the coverage that was provided, nor did the legislature intend to “sanction the deception” of consumers on the sale of policies. This is perhaps one of the most shocking cases I have seen in this context.
In order to cure this situation, insurers are required to adequately disclose the limitations of minimum limits of UM/UIM policies in the form of an exclusion to the policy.