American Automobile Insurance Company v. First Mercury Insurance Company et al

Filing 181

MEMORANDUM OPINION AND ORDER denying in part and granting in part 114 118 MOTIONS to Exclude Testimony by Chief Judge M. Christina Armijo. (vv)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO

AMERICAN AUTOMOBILE INSURANCE
COMPANY,
Plaintiff,
v.

No. 13:CV-439 MCA/LF

FIRST MERCURY INSURANCE COMPANY;
STANDARD E & S, LLC; ZIA TRANSPORT, INC.;
BERGSTEIN ENTERPRISES, LTD.,
Defendants.

MEMORANDUM OPINION AND ORDER
THIS MATTER is before the Court on AAIC’s Motion to Exclude Expert
Testimony [Doc. 114] and First Mercury’s Motion to Exclude Expert Testimony [Doc.
118]. The Court has considered the parties’ submissions and the relevant law, and is
otherwise fully informed. For the following reasons, the Court GRANTS in part and
DENIES in part both Motions, and sets forth the permissible parameters of the experts’
testimony.
I.

Background
The details of the underlying action and insurance policies at issue are described

more fully in this Court’s rulings on the parties’ cross motions for summary judgment. In
March, 2010, Kevin Udy was killed in an accident in which his pickup truck collided
with a trailer being hauled by a tractor driven by Monte Lyons. Lyons was an employee
of Standard E & S, LLC (Standard) and the tractor and trailer were owned by Zia

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Transport, Inc. (Zia). A year later, the personal representative of Udy’s estate, along with
Udy’s wife and eight children, filed a wrongful death action against Lyons, Standard, and
Zia (the Udy Action). The plaintiffs also named Defendant Bergstein Enterprises, Ltd
(Bergstein), the management company for Standard and Zia, as a defendant in the Udy
Action. [Doc. 117-1 (Udy Action Complaint)]
Three insurance policies are at issue. Two were issued by AAIC and one by First
Mercury. First, the AAIC Standard Policy had a limit of $1 million and covered Standard
as a named insured. Second, the First Mercury Policy was an excess policy and had a
limit of $4 million. The AAIC Standard Policy was named as “underlying insurance” to
the First Mercury Standard Policy. Third, the AAIC Bergstein Policy had a limit of $1
million and covered Bergstein as a named insured.
Although the parties disagree as to whether AAIC properly tendered the policy
limits on the AAIC Standard Policy to First Mercury, they agree that First Mercury took
the lead in settlement negotiations with the Udy plaintiffs. [Doc. 116, ¶¶ 18-19, 21
(asserting that AAIC tendered its limits on the AAIC Standard Policy to First Mercury
and that First Mercury “took control” of the negotiations); Doc. 131, ¶¶ 18-21 (disputing
that AAIC properly tendered its limits but agreeing that First Mercury “took over the
primary role” in negotiations); Doc. 116-2, Exh. H & I, pgs. 25-27]

During the

negotiations, First Mercury offered the Udy plaintiffs the $1 million available under the
AAIC Standard Policy, but did not offer the entire $4 million available under the First
Mercury Standard Policy. [Doc. 116, ¶ 27 (asserting these facts); Doc. 131, ¶ 27 (not
disputing these facts); Doc. 116-2, Exh. J, pg. 29; Doc. 116-6, Exh. 133, pg. 20] No
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funds from the AAIC Bergstein Policy were offered during negotiations. [Doc. 131, pg.
11, ¶ Y (stating that AAIC offered the Bergstein Policy limit after the verdict); Doc. 138,
pg. 6, ¶ Y (not disputing this assertion); Doc. 131-9]
After a jury trial, judgment was entered against Standard, Zia, and Bergstein for a
total of $58 million, including $30,300,000 against Standard and $22,050,000 against
Bergstein. [Doc. 116, ¶ 29 (asserting these facts); Doc. 131, ¶ 29 (not disputing these
facts); Doc. 116-3, Exhs. 1-2] The case was then settled for $43 million, which was paid
as follows: $1 million by AAIC pursuant to the AAIC Standard Policy; $4 million by
First Mercury pursuant to the First Mercury Standard Policy; $1 million by AAIC
pursuant to the AAIC Bergstein Policy; $4 million by Commerce and Industry pursuant
to an excess policy to the AAIC Bergstein Policy, which is not at issue here; and $33
million by First Mercury and its liability insurers. [Doc. 116, ¶ 30 (asserting these facts);
Doc. 131, ¶ 30 (not disputing these facts)]
AAIC filed a Complaint for Declaratory Judgment, Bad Faith, and Equitable
Subrogation against First Mercury, Standard, Zia, and Bergstein, as well as the Udy
plaintiffs. [Doc. 1] The Complaint alleged that First Mercury breached its duty of good
faith and fair dealing by failing to settle with the Udy plaintiffs within policy limits, and
that AAIC is entitled to equitable subrogation and declaratory relief. [Doc. 4] In its suit,
AAIC seeks $1 million, which represents the amount of the AAIC Bergstein Policy that
AAIC paid as a result of First Mercury’s failure to settle the Udy Action within the limits
of the AAIC Standard Policy and First Mercury Standard Policy. [Doc. 4, ¶¶ 30-32] In
the First Amended Complaint for Declaratory Judgment, Bad Faith, and Equitable
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Subrogation (First Amended Complaint), AAIC dismissed the Udy plaintiffs, leaving
First Mercury, Standard, Zia, and Bergstein as defendants. [Doc. 4] Standard, Zia, and
Bergstein were then dismissed from the suit for failure to state a claim against them.
[Doc. 33] Thus, First Mercury is the only remaining defendant. [Id.]
First Mercury answered the First Amended Complaint and counterclaimed against
AAIC, alleging that AAIC acted in bad faith by, inter alia, failing to notify First Mercury
of the AAIC Bergstein Policy. [Doc. 13] First Mercury maintains that, if AAIC had
disclosed the AAIC Bergstein Policy earlier in the negotiations, “the Udy Action likely
would have settled prior to trial within policy limits.” [Doc. 13, ¶ 25] First Mercury
seeks equitable and punitive damages. [Doc. 13, ¶¶ 28, 32] Both parties now move to
exclude the other’s expert witness. [Doc. 114, 118]
II.

Rule 702 and Expert Testimony
Rule 702 imposes a special gatekeeping obligation on this Court to ensure that

expert testimony is not admitted at trial unless it is both relevant and reliable. See Kumho
Tire Co., Ltd v. Carmichael, 526 U.S. 137, 141 (1999); Daubert v. Merrell-Dow Pharm.,
Inc., 509 U.S. 579, 592-93 (1993). The relevance of such testimony also must be
weighed against “the danger of unfair prejudice, confusion of the issues, or misleading
the jury” as well as “considerations of undue delay, waste of time, or needless
presentation of cumulative evidence.” Fed. R. Evid. 403.
The Federal Rules of Evidence provide that:
If scientific, technical, or other specialized knowledge will assist the trier of
fact to understand the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience, training, or
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education, may testify thereto in the form of an opinion or otherwise, if (1)
the testimony is based upon sufficient facts or data, (2) the testimony is the
product of reliable principles and methods, and (3) the witness has applied
the principles and methods reliably to the facts of the case.
Fed. R. Evid. 702 (2000).
“A two-part test applies to determine admissibility. First, the district court must
determine “whether the expert is qualified ‘by knowledge, skill, experience, training, or
education’ to render an opinion.” Conroy v. Vilsack, 707 F.3d 1163, 1168 (10th Cir.
2013) (internal quotation marks and citation omitted); see Fed. R. Evid. 702). Second,
the court “must satisfy itself that the proposed expert testimony is both reliable and
relevant, in that it will assist the trier of fact, before permitting a jury to assess such
testimony.” Id. (internal quotation marks and citation omitted).
While the Court is not required to consider any particular set of factors or utilize a
particular procedure in making such determinations with respect to expert testimony, the
Court must make some kind of determination on the record in order to demonstrate that it
has performed its gatekeeping function. See United States v. Velarde, 214 F.3d 1204,
1209 (10th Cir. 2000); Goebel v. Denver & Rio Grande W. R.R. Co., 215 F.3d 1083,
1088 (10th Cir. 2000). “The proponent of expert testimony bears the burden of showing
that its proffered expert’s testimony is admissible.” United States v. Nacchio, 555 F.3d
1234, 1241 (10th Cir. 2009).
The first question is whether the expert is qualified to testify as to the proposed
opinions.

Generally speaking, “[a]s long as an expert stays within the reasonable

confines of his subject area, our case law establishes a lack of specialization does not

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affect the admissibility of [the expert] opinion, but only its weight.” Compton v. Subaru
of Am., Inc., 82 F.3d 1513, 1520 (10th Cir. 1996) (internal quotation marks and citation
omitted) overruled on other grounds by Kumho Tire Co., Ltd., 526 U.S. 137. Thus, the
qualifications necessary to opine in a given case depend on the issues in that case. In
other words, the question before the Court is whether the specific issues to be addressed
by the expert fall within the “reasonable confines of [the expert’s] subject area.” See,
e.g., Ralston v. Smith & Nephew Richards, Inc., 275 F.3d 965, 970 (10th Cir. 2001)
(assessing whether a proposed expert, while qualified in orthopedic surgery, was
qualified to give opinions related to the specific technique at issue). It is the proponent’s
burden to “connect the proverbial dots” between the expert’s general expertise and the
issues pertinent to the case. Conroy, 707 F.3d at 1169.
In making the second determination—whether the proposed testimony is
reliable—“generally, the district court should focus on an expert’s methodology rather
than the conclusions it generates.” Nacchio, 555 F.3d at 1241 (internal quotation marks
and citation omitted). Under Daubert, courts typically assess “1) whether a theory or
technique can be tested; 2) whether it has been subjected to peer review and publication;
3) the known or potential error rate of the theory or technique; and 4) whether the theory
or technique enjoys general acceptance within the relevant scientific community. United
States v. Hankey, 203 F.3d 1160, 1167 (9th Cir. 2000) (citing Daubert, 509 U.S. at 592–
94). But “[t]he Daubert factors (peer review, publication, potential error rate, etc.)
simply are not applicable to [nonscientific] testimony, whose reliability depends heavily
on the knowledge and experience of the expert, rather than the methodology or theory
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behind it.” Hankey, 203 F.3d at 1169; Hangarter v. Provident Life and Acc. Ins. Co., 373
F.3d 998, 1017 n.14 (9th Cir. 2004) (addressing reliability of expert testimony as to
industry standards); State v. Torrez, 2009-NMSC-029, ¶ 21, 146 N.M. 331, 210 P.3d 228
(stating that “when testing the reliability of non-scientific expert testimony, rather than
testing an expert’s scientific methodology as required under Daubert and Alberico, the
court must evaluate a non-scientific expert’s personal knowledge and experience to
determine whether the expert’s conclusions on a given subject may be trusted.”).
Rule 702 provides that an expert may “testify in the form of an opinion.”
Moreover, “[a]n opinion is not objectionable just because it embraces an ultimate issue.”
Fed. R. Evid. 704(a). However, while “[a]n expert witness may testify regarding an
ultimate issue of fact” the expert “may not offer an opinion that ‘articulates the ultimate
principles of law governing the deliberations of the jury.’” Spendrup v. Am. Family Mut.
Ins. Co., No. 13-CV-00513-KLM, 2014 WL 656862, at *3 (D. Colo. Feb. 20, 2014)
(quoting Specht v. Jensen, 853 F.2d 805, 808 (10th Cir. 1988) (en banc)). “An expert
witness may refer to the law so long as he does not state legal conclusions drawn by
applying the law to the facts.” Spendrup, 2014 WL 656862, at *3 (internal quotation
marks and citation omitted). In addition, expert testimony should be excluded “when the
purpose of [the] testimony is to direct the jury’s understanding of the legal standards
upon which their verdict must be based.” Specht, 853 F.2d at 810. “In no instance can a
witness be permitted to define the law of the case.” Id. On the other hand, mere
reference to legal matters does not render the testimony inadmissible: “a witness may

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properly be called upon to aid the jury in understanding the facts in evidence even though
reference to those facts is couched in legal terms.” Id. at 809.
III.

Analysis
The Court, here, fulfills its gatekeeping function. The parties should keep in mind,

however, that the rulings stated herein, based upon the proffers made, are subject to
reconsideration in the event that unforeseen events or a change in context should occur
during the trial. For this reason, at trial, the parties are directed to notify the Court
outside the presence of the jury before eliciting expert testimony on disputed topics, so
that the opposing party has a fair opportunity to renew an objection and the Court may
issue a timely ruling on such renewed objections.
A. Qualifications
Both parties challenge the qualifications of the other’s expert. Because the Court
will rule that the proposed testimony on contract interpretation and priority of the policies
is inadmissible, it need not address the experts’ qualifications to opine on those matters.
It will therefore address the experts’ qualifications to opine on claims handling and bad
faith.
1. Charles D. Henderson
As to claims handling, AAIC argues that “Mr. Henderson’s ‘extensive experience’
in claims handling does not include experience in New Mexico claims handling practices
and his assertion that claims handling is similar in New Mexico as elsewhere is
unsupported.”

[Doc. 136, pg. 2]

AAIC points to City of Hobbs v. Hartford Fire

Insurance Company, in which the Tenth Circuit stated that “[t]hough a proffered expert
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possesses knowledge as to a general field, the expert who lacks specific knowledge does
not necessarily assist the jury.” 162 F.3d 576, 587 (10th Cir. 1998). The Tenth Circuit
held that the district court did not abuse its discretion in excluding expert testimony on
bad faith where the expert did not have expertise in New Mexico claims handling. Id.;
see also Garcia v. Metro. Life Ins. Co., 859 F. Supp. 2d 1229, 1232 (D.N.M. 2012)
(excluding expert testimony on bad faith because, inter alia, the expert did not have
experience in New Mexico). Other Tenth Circuit cases, however, have held that “[a]s
long as an expert stays within the reasonable confines of his subject area, our case law
establishes a lack of specialization does not affect the admissibility of the expert opinion,
but only its weight.” Compton, 82 F.3d at 1520; cf. Conroy, 707 F.3d at 1168–69 (stating
that “the court correctly looked to whether [a particular topic] was ‘within the reasonable
confines’ of [the expert’s] expertise”); see also King v. Allstate Ins. Co., No. 11-CV00103-WJM-BNB, 2013 WL 3943607, at *7 (D. Colo. July 31, 2013) (stating that where
“there is no evidence showing that Colorado’s regulations are materially different than
states in which [the expert] has significant training and experience” and “also no
evidence showing that the regulations governing the Colorado insurance industry are
materially different from those states,” “[the expert’s] lack of training, qualifications, and
experience with Colorado’s insurance industry do not make him unqualified to serve as
an expert.”).
Mr. Henderson’s curriculum vitae indicates that he holds degrees in organizational
management and business administration-finance. [Doc. 114-6, pg. 23-24] He began
working in the insurance industry in 1974 as a claims adjuster, and continued to work in
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progressively more responsible claims adjustment/claims management positions until
2002, when he formed Henderson Consulting. [Doc. 114-6, pg. 21-23] In several
positions Mr. Henderson had oversight of auto and uninsured/underinsured motorist
claims. [Doc. 114-6. Pg. 22-23] From 1976 to 1981, Mr. Henderson was a claims
adjuster for Automobile Rental Insurance and Services and was responsible for the
western region, including New Mexico. [Doc. 130-1, ¶ 4] From 1986 to 1999, he was a
Home Office Claim Superintendent at CIGNA, and again was responsible for the western
region, including New Mexico. [Doc. 130-1, ¶ 5] He stated in an affidavit that he has
“specific claims handling experience in New Mexico.” [Doc. 130-1, ¶ 3] Although he
acknowledges that there may be “legal peculiarities” in New Mexico law, he asserts that
these peculiarities “are not at issue in this case.” [Doc. 130-1, ¶ 3] He has testified over
two hundred times in the United States, including on claims handling and bad faith.
[Doc. 114-6, pg. 21]
The Court finds that Mr. Henderson is qualified by experience and training as an
expert in claims handling. Even if Mr. Henderson’s affidavit attesting to experience with
New Mexico claims processing is vague, as AAIC argues [Doc. 136, pg. 3], the extent to
which he is familiar with New Mexico-specific claims handling procedures and practices
is fodder for cross-examination. AAIC may “cross-examine Mr. [Henderson] on his
[New Mexico]-specific experience, training, and qualifications and . . . argue to the jury
that the lack thereof means that the jury should afford his opinions less weight than the
expert opinions proffered by [AAIC].” King, 2013 WL 3943607, at *7.

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2. Thomas Rushton
First Mercury challenges Mr. Rushton’s qualifications to testify about claims
handling. [Doc. 118, pg. 6] It argues that “Mr. Rushton’s list of qualifications does not
show any recent experience in the insurance industry . . . that would pertain to the
handling of commercial automobile insurance claims.” [Doc. 118, pg. 6] Mr. Rushton
holds degrees in philosophy and law and his experience includes five years as a claims
adjuster in New Mexico, four and a half years as an attorney in private practice in New
Mexico focusing on insurance defense, and twenty-one years as the Chief Deputy
Superintendent of Insurance in New Mexico. [Doc. 118-2] While a claims adjuster, he
worked on claims related to commercial trucking accidents and auto claims. [Doc. 118-4,
Rushton Depo., 15:8-20] While Chief Deputy Superintendent, he was responsible for
providing guidance to all Insurance Department staff, overseeing handling of medical
malpractice claims against the New Mexico Patients Compensation Fund, supervising
settlement negotiations with the Fund, and determining whether to accept or decline
settlement offers related to coverage under the Fund, among other things. [Doc. 118-2]
Given that Mr. Rushton has experience adjusting auto claims, the Court
understands First Mercury’s argument to be that his experience is stale, having been
gained over twenty-five years ago. The Court is not persuaded that this fact renders Mr.
Rushton unqualified to testify here. Since his position as claims adjuster, Mr. Rushton
has been continuously involved with the insurance industry, including claims handling,
albeit in the medical malpractice arena. Moreover, he has been responsible for aspects of
settlement negotiations and interactions between primary and secondary insurers, both of
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which are relevant to the issues presented here. Finally, First Mercury “has presented
nothing to suggest that the field has undergone dramatic recent change that would render
Mr. [Rushton]’s knowledge and experience too stale.” Owens v. Amtrol, Inc., 94 F. Supp.
2d 952, 955 (N.D. Ind. 2000). The Court finds that Mr. Rushton is qualified to testify on
claims handling.
B. Opinions
Having concluded that Mr. Henderson and Mr. Rushton are qualified to opine on
claims handling, the Court turns to the substance of the proposed testimony. The reports
submitted by the experts in large part mirror each other. Both reports share three sections
in common, addressing: 1) construction of the policies and opinions on the priority order
of the policies, 2) the timeline of claims handling events from the accident through the
verdict in the Udy Action, and 3) the experts’ opinion on whether the other party acted in
bad faith in handling the claim and negotiating settlement. [Doc. 114-5, pg. 17-28; Doc.
118-1, pg. 1-15] Both parties propose to offer their experts’ opinion on the interpretation
of the policies and whether the other party acted in bad faith. [Doc. 118-1, pg. 1 (scope
of Mr. Rushton’s report); Doc. 62; Doc. 130, pg. 2; see Doc. 114-5, pg. 3 (stating the
scope of Mr. Henderson’s report)] The Court will therefore address the admissibility of
testimony on each topic in turn.
1. Contract Interpretation
Although First Mercury states in its Response to AAIC’s Motion to Exclude
Testimony of Charles D. Henderson that “Mr. Henderson is not being offered to provide
an opinion on the interpretation of insurance contracts under New Mexico law,” [Doc.
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130, pg. 17] Mr. Henderson’s report is replete with his construction of the three policies
at issue. [Doc. 114-5, pg. 14 n.5, 17, 18, 19] Similarly, the first portion of Mr. Rushton’s
report consists of a summary of New Mexico case law pertaining to interpretation of
insurance contracts, particularly primary and secondary policies. [Doc. 118-1, pg. 1-4]
Mr. Rushton also sets forth features of each policy pertaining to its relation to the others,
and his opinions as to the priority order of the policies. [Doc. 118-1, pg. 2-4]
The experts’ focus on the priority of the policies is to be expected, since, as
explained more fully in this Court’s discussion of the parties’ cross-motions for summary
judgment in the Memorandum Opinion and Order filed on March 31, 2017 [Doc. 162]
both parties’ bad faith claims are predicated in large measure on the insurers’
understanding of the order of priority of the three insurance policies. In other words,
whether AAIC had a duty to disclose the AAIC Bergstein Policy upon initiation of
settlement negotiations in the Udy Action, for example, depends on whether that policy
was primary or excess over the other policies. Thus, Mr. Henderson’s opinions as to
AAIC’s claims handling are based on his opinions on how the policies should be
interpreted.

Mr. Rushton’s opinions on claims handling are also founded on his

understanding of the priority of the policies.
The experts’ testimony on construction of the policies will not be admitted.
Absent an ambiguity in the contract, interpretation of a contract is a matter of law to be
conducted by the Court. Mark V, Inc. v. Mellekas, 1993-NMSC-001, ¶ 12, 114 N.M.
778, 845 P.2d 1232. Whether an ambiguity exists is also a question of law that may be
determined by the Court through examination of extrinsic evidence. Id. If an ambiguity
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exists, and “if the proffered evidence of surrounding facts and circumstances is in
dispute, turns on witness credibility, or is susceptible of conflicting inferences, the
meaning must be resolved by the appropriate fact finder.” Id.
Here, the parties have not identified any “collateral evidence of the circumstances
surrounding the execution of the agreement” that indicates that “the language of the
agreement is unclear.”

Id.

Indeed, neither party has argued that the policies are

ambiguous or asked the Court to resolve an ambiguity. See Great Am. Ins. Co. of N.Y. v.
W. States Fire Prot. Co., 730 F. Supp. 2d 1308, 1318 (D.N.M. 2009) (“That the parties
disagree about how the contract’s language should be construed does not, on its own,
create ambiguity” citing Levenson v. Mobley, 1987-NMSC-102, ¶ 7, 106 N.M. 399, 744
P.2d 174 (1987)). Instead, in their Motions for Summary Judgment, the parties requested
that the Court construe the policies as a matter of law, [Doc. 116, 117] and the Court has
done so to the extent construction does not depend on determination of facts. [Doc. 162]
See Great Am. Ins. Co. of N.Y., 730 F. Supp. 2d at 1318 (interpreting the contract as a
matter of law where “[t]he parties . . . pointed to no factual disputes about the
surrounding circumstances, nor ha[d] the [c]ourt discovered competing inferences, that
would lead the [c]ourt to conclude that there is an ambiguity, the resolution of which
turns on witness credibility” and “the parties . . . asked the [c]ourt to interpret the
[c]ontract as a matter of law”).
The proffered testimony as to construction of the policies and their priority order
is a statement of law that infringes on the Court’s sole duty to define the law. See Specht,
853 F.2d at 810 (stating that “[i]n no instance can a witness be permitted to define the law
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of the case”); Employers Reinsurance Corp. v. Mid-Continent Cas. Co., 202 F. Supp. 2d
1212, 1217 (D. Kan. 2002) (stating that if there is no ambiguity, expert testimony on
contract interpretation is improper). Neither expert will be permitted to testify as to
interpretation of the policies, including who is insured under each policy, the operation of
the “other insurance,” omnibus, or other clauses in the policies, or other topics going to
the priority of the three policies at issue. See Gallatin Fuels, Inc. v. Westchester Fire Ins.
Co., 410 F. Supp. 2d 417, 421 (W.D. Pa. 2006) (excluding testimony on insurance policy
construction and application).
They may, however, testify about the general purposes and functions of primary
and excess policies, general principles of claims handling, and other general foundational
aspects of insurance that would be helpful to the jury in this case, as long as such
testimony is relevant and complies with the other rules of evidence. In doing so, the
experts may “aid the jury in understanding the facts in evidence even though reference to
those facts is couched in legal terms.” Specht, 853 F.2d at 809-10 (stating that “an
expert’s testimony is proper under Rule 702 if the expert does not attempt to define the
legal parameters within which the jury must exercise its fact-finding function.”).
2. Good Faith and Fair Dealing
A significant portion of the proposed testimony pertains to the insurers’ processing
of the Udy claim and alleged bad faith. To prepare his report and form his opinions, Mr.
Henderson relied on twenty-two different sets of documents. [Doc. 114-6, pg. 30] The
report includes a detailed timeline of events in the Udy Action and AAIC’s and First
Mercury’s management of the claim. Throughout the timeline, Mr. Henderson provides
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his opinion of the reasonableness vel non of the insurers’ handling of the claim. [See,
e.g., Doc. 114-5, pg. 29, 30; 114-6, pg. 2, 4, 6, 7, 10, 11, 12, 14, 15] Mr. Henderson
states several times that AAIC’s actions were “unreasonable and violated accepted
industry standards, practices, and procedures” without stating what those standards,
practices, and procedures are or who promulgated them. [See, e.g., Doc. 14-5, pg. 29, 30;
Doc. 114-6, pg. 7, 11, 15] He also states that AAIC “breach[ed] the Guiding Principles
for Primary and Excess Insurers,” [Doc. 114-6, pg. 11, 15] and cites two such principles,
including a “duty of investigating promptly and diligently even those cases in which it is
apparent that its policy limits may be consumed” and duty to “give prompt written notice
to the excess insurer, when known, stating the results of investigation and negotiation.”
[Doc. 114-6, pg. 15]
Mr. Henderson also states that “it is clear from [the] timeline” that AAIC “violated
multiple provisions of [] N[MS]A 1978, § 59A-16-20,” including subsections (a), (b), (c),
and (e) of that statute. [Doc. 114-5, pg. 29] Mr. Henderson states that “[i]t is equally
clear from the events [shown in the timeline] that First Mercury’s handling of the claim
was reasonable.” [Doc. 114-5, pg. 29] Finally, Mr. Henderson states several times that
AAIC “breached the duty of good faith and fair dealing.” [Doc. 114-5, pg. 29; 114-6, pg.
15]
Similarly, Mr. Rushton’s report includes six pages summarizing case law on
insurance bad faith. [Doc. 118-1, pg. 5-11] Next, he provides a detailed timeline of
events from the accident to the jury verdict. [Doc. 118-1, pg. 11 to 118-2, pg. 8] At
various points in the timeline, Mr. Rushton provides his subjective evaluation of the
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handling of the Udy claims. [See, e.g., Doc. 118-1, pg. 14, 15; 118-2, pg. 1, 2] In
addition, Mr. Rushton provides six pages in which he describes in detail First Mercury’s
conduct that allegedly constitutes bad faith. [Doc. 118-2, pg. 8-14]
Both experts’ reports set out their experience, the facts about the accident and Udy
Action, a timeline of events and communications related to claims handling, case law,
and contract terms as a basis for their opinions. The level of detail in the timelines and
each expert’s evaluation of the insurers’ conduct throughout the timelines provides the
requisite tie between the experts’ experience, the facts relied on, and their opinions. See
Kumho Tire Co., 526 U.S. at 156 (stating that “an expert might draw a conclusion from a
set of observations based on extensive and specialized experience”); Fed. R. Evid. 702
advisory committee’s note to the 2000 amendments (“In certain fields, experience is the
predominant, if not sole, basis for a great deal of reliable expert testimony.”). The Court
finds that the proposed testimony based on this analysis is reliable.
In addition, to the extent either expert references industry standards and best
practices, several courts have held that the reliability of such testimony on industry
standards “is dependent upon the witness’s knowledge of, and experience within, the
insurance industry.” Hangarter, 373 F.3d at 1017 n.14. Thus, such testimony was
reliable where the expert’s knowledge of the standards was grounded in his experience.
Id. at 1018; cf. Am. Nat. Prop. & Cas. Co. v. Cleveland, 2013-NMCA-013, ¶ 27, 293
P.3d 954 (holding that the district court did not err in admitting testimony where the
expert “had not properly stated [an insurer]’s own standards for the investigation and

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processing of claims, how [the insurer] failed to meet those standards, and how [the
insurer]’s actions differed from industry standards” in his affidavit).
Mr. Henderson and Mr. Rushton both have extensive experience in the insurance
industry. Mr. Henderson has worked for six different insurance companies and has held
several leadership positions with the Federation of Defense and Corporate Counsel.
[Doc. 114-6, pg. 21-24] He is a member of the Society of Registered Professional
Adjusters. [Doc. 114-6, pg. 24] In his work for the Superintendent of Insurance, Mr.
Rushton advised supervisors of the investigations and consumer complaints units and
reviewed the more complicated cases that arose through those channels. [Doc. 144-1,
Rushton Depo., 35:2-36:4] He worked with the claims adjusters for the New Mexico
Patients Compensation Fund on approximately sixty medical malpractice claims per year.
[Doc. 144-1, Rushton Depo., 40:14-41:22]

He attended quarterly meetings of the

National Association of Insurance Commissioners and served on several task forces,
including some addressing excess insurer issues. [Doc. 144-1, Rushton Depo., 45:3-11]
The Court finds that both Mr. Henderson and Mr. Rushton have the breadth of experience
and knowledge necessary to render testimony on industry standards reliable.

See

Hangarter, 373 F.3d at 1016, 1018 (holding that the district court properly considered the
expert’s twenty-five year experience in the insurance industry in assessing the reliability
of his testimony on industry standards).
The Court now turns to the particulars of the proposed testimony related to bad
faith. Whether an insurer had a duty to deal in good faith with its insured and with other
insurers is a question of law to be determined by the Court. Azar v. Prudential Ins. Co. of
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Am., 2003-NMCA-062, ¶ 43, 133 N.M. 669, 68 P.3d 909 (“The existence of a duty, . . .
remains a question of law for the trial court to determine and is answered by reference to
legal precedent, statutes, and other principles comprising the law.”). Moreover, whether
an insurer breached that duty is a matter to be determined by the jury upon application of
the law to the facts. R.A. Peck, Inc. v. Liberty Fed. Sav. Bank, 1988-NMCA-111, ¶ 12,
108 N.M. 84, 766 P.2d 928 (“Once it has been determined that a duty exists as a matter of
law, then any claimed breach of that duty presents a question of fact to be resolved by the
trier of fact.”).
Therefore, neither expert may testify as to whether AAIC or First Mercury had a
duty to the other, or whether they breached that duty, as the Court will instruct on the
former and the jury will determine the latter. The experts may not characterize the
actions of either as being in “bad/good faith,” or “reasonable” or “unreasonable.”
Instead, they may testify as to facts relevant to good faith, such as industry standards for
claims handling, typical practices and procedures, and the facts behind the parties’ claims
handling in this case. See Gallatin Fuels, Inc., 410 F. Supp. 2d at 421 (permitting expert
testimony on “insurance claims adjusting procedure [and] an insurer’s compliance with
industry customs and standards”); Rule 13-1705 NMRA (stating that “what is
customarily done by those engaged in the insurance industry is evidence of whether the
insurance company acted in good faith.

However, the good faith of the insurance

company is determined by the reasonableness of its conduct, whether such conduct is
customary in the industry or not. Industry [customs] [standards] are evidence of good or
bad faith, but they are not conclusive.”). They may testify about interactions between
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primary and secondary insurers. With respect to § 59A-16-20, the experts may testify as
to what the statute provides. They may testify about AAIC’s or First Mercury’s actions
vis á vis the statutory requirements and the methods used by insurers to comply with the
statute, but may not testify that the insurers violated the statute. To draw conclusions as
to whether AAIC breached a duty or violated the statute would “circumvent[] the jury’s
decision-making function by telling it how to decide the case.” Specht, 853 F.2d at 808;
see AXIS Specialty Ins. Co. v. New Hampshire Ins. Co., No. 15-0809-CV-W-ODS, 2017
WL 445746, at *2 (W.D. Mo. Feb. 2, 2017) (permitting an expert to testify along these
lines).
Of course, at all times an expert’s testimony is subject to the requirement that
expert testimony must be helpful to the jury. Werth v. Makita Elec. Works, Ltd., 950 F.2d
643, 648 (10th Cir. 1991) (stating that “the ‘touchstone’ of admissibility is helpfulness to
the trier of fact”). Expert testimony that “would not even marginally assist the trier of
fact, . . . must be viewed as a ‘needless[] present[ation]’” of evidence. Thompson v. State
Farm Fire & Cas. Co., 34 F.3d 932, 941 (10th Cir. 1994) (quoting Fed. R. Evid. 403).
Hence, the testimony by Mr. Henderson and Mr. Rushton should pertain to aspects of the
insurance industry that are beyond the jury’s ken, as there is no need for expert testimony
on issues that the jury is perfectly “capable of assessing for itself.” Id. The issues here
involve, among other things, the roles and interactions between primary and secondary
insurers, as well as evaluations of the likelihood of settlement with the Udy plaintiffs.
Expert testimony is appropriate to assist the jury in understanding these issues. See
Gallatin Fuels, Inc., 410 F. Supp. 2d at 421.
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3. Other Topics
As to the reasonableness of First Mercury’s reliance on Paul Yarbrough’s
assessment of the Udy claims, Mr. Henderson first sets out the “generally accepted
insurance practices for insurers seeking advice of counsel,” including the source of those
standards, [Doc. 114-7, pg. 2] then compares the contents of Mr. Yarbrough’s report
against those standards. [Doc. 114-7, pg. 3-6] Mr. Henderson concludes that Mr.
Yarbrough’s report contains the required contents and that it “arrives at reasonable
conclusions and evaluations based on the information available to Mr. Yarbrough.”
[Doc. 114-7, pg. 6] Ultimately, Mr. Henderson concludes that “it was reasonable for
First Mercury to have relied on Mr. Yarbrough’s analysis and evaluations in the handling
of the Udy claim.” [Doc. 114-7, pg. 6] Thus, Mr. Henderson articulated the standards
for such reports and explained how he evaluated the report against those standards to
reach his conclusions. The Court finds Mr. Henderson’s analysis on this point to be
reliable.
Other than general arguments about Mr. Henderson’s lack of qualifications to
opine about claims handling practices, AAIC makes no objection to Mr. Henderson’s
proposed testimony about Mr. Yarbrough’s report or the reasonableness of First
Mercury’s reliance thereon. [Doc. 114, 136] Testimony about the standards for such
evaluations and whether the report provides information consistent with those standards
is properly admitted under Rule 702.

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IV.

Conclusion
IT IS THEREFORE ORDERED THAT for the reasons stated herein, AAIC’s

Motion to Exclude Expert Testimony [Doc. 114] is DENIED in part and GRANTED in
part, as set out above.
IT IS FURTHER ORDERED THAT First Mercury’s Motion to Exclude Expert
Testimony [Doc. 118] is DENIED in part and GRANTED in part, as set out above.
SO ORDERED this 30th day of September, 2017.

M. CHRISTINA ARMIJO
Chief United States District Judge

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