Fava v. Liberty Mutual Insurance Company

Filing 102

MEMORANDUM OPINION AND ORDER by Chief District Judge William P. Johnson Denying Defendant's Motion for Summary Judgment as to Counts II and III and Granting Summary Judgement on Count IV Negligence Claim 68 (meq)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
_____________________________
HECTOR FAVA and BARBARA FAVA,
Plaintiffs,
v.

17cv00456 WJ/LF

LIBERTY MUTUAL INSURANCE
CORPORATION,
Defendant.

MEMORANDUM OPINION AND ORDER
DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
AS TO COUNTS II AND III
and
GRANTING SUMMARY JUDGMENT ON COUNT IV NEGLIGENCE CLAIM
THIS MATTER comes before the Court upon Defendant’s Motion for Summary Judgment
on Plaintiffs’ Statutory Claims and Negligence (Counts II, III and IV), filed June 1, 2018 (Doc.
68). Having reviewed the parties’ briefs and applicable law, the Court denies Defendant’s motion
as to Counts II and III, but grants Defendant’s motion as to Count IV.
Plaintiffs Hector and Barbara Fava are homeowners who are suing Liberty for damages
under a Homeowners Policy (“Policy”) issued by Liberty to Mr. Fava. Plaintiffs (or “the Favas”)
allege property damages to their home stemming from a water leak under their home. Plaintiffs
initially filed the Complaint on July 29, 2016 in the Second Judicial District, County of Bernalillo,
and Liberty removed the case to federal court under diversity jurisdiction on April 17, 2017.
According to the Complaint, on August 18, 2015, a pipe in the crawlspace underneath
Plaintiffs’ home burst, flooding the crawlspace with several inches of standing water. Almost

immediately after the leak, Plaintiffs noticed cracks in load-bearing walls and a sloping floor.
Plaintiffs tried to stop the leak and reported the incident to Plaintiffs’ insurer, Liberty. The water
from the burst pipe caused the floor in Plaintiffs’ kitchen and living room to begin sloping
downward and large cracks to form in several load-bearing walls in the home. The Favas reported
the damage to Liberty. Liberty investigated and concluded that much of the structural damage
pre-existed the water leak and that the water leak caused Plaintiff the structural damages.
Plaintiffs assert that Liberty repeatedly denied coverage of Plaintiffs’ claim based on
inadequate investigations of the cause of the damage to the home as well as its misrepresentations
about those investigations. Since August 2015, Plaintiffs’ home has had a 10’ diameter hole in the
living room, made when Liberty performed its inspection of the damage to Plaintiffs’ home.
Because of Liberty’s improper denial of coverage and mishandling of Plaintiffs’ claim, Plaintiffs’
home continues to deteriorate, and Plaintiffs have been unable to use a significant portion of their
home since that time.
Defendant denies Plaintiffs’ contentions. Following the reported water loss, Liberty
retained independent adjusters to inspect the water loss and retained an engineer to inspect the
water loss and report the findings. Based on those findings and the damages associated with the
water leak, Defendant claims that it paid what was owed under the policy.
Liberty claims that the damage to Plaintiffs’ home was caused by water coming into
crawlspace from outside the house over a long period of time prior to bursting of the water pipe,
and that coverage for such damage was excluded under the policy that was issued to Plaintiffs.
Plaintiffs maintain that the damage was caused by the acute event of a burst water line causing
water to flood the crawlspace area, which is a covered event under their policy. The Complaint
asserts four claims for relief against Defendant:

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Count I: Breach of Contract and the Covenant of Good Faith and Fair Dealing;
Count II: Violation of Unfair Practices Act;
Count III: Violation of New Mexico Insurance Code; and
Count IV: Negligence.
Doc. 1-3 (First Am. Compl.) at 15. The Court has become quite familiar with this lawsuit,
having denied relief to Liberty on four of dispositive motions Defendant has filed. See Docs. 98,
99, 100 and 101 (denying relief on Docs. 66, 67, 69 and 70). This last motion, addressing Counts
II, III and IV, is the last dispositive motion presented for the Court’s consideration.
The Policy provisions and factual background in this case have been set forth in detail by
the Court’s recent decisions denying summary judgment on Plaintiffs’ claims for emotional injury,
breach of contract and bad faith claims, see Docs. 99, 100 and 101, and there is no reason to
reiterate them here.
I.

Count II: Violation of Unfair Practices Act
Plaintiffs allege that Liberty violated the New Mexico Unfair Practices Act (“UPA”) by

failing to deliver the quality and quantity of goods or services contracted for; representing that
services have characteristics, uses, benefits, or quantities that they do not have; and knowingly
making false or misleading oral and written statements in connection with the sale, lease, rental or
loan of services. See NMSA 1978 §§57-12-2(D)(17). A claim under the UPA has four elements:
First, the complaining party must show that the party charged made an oral or
written statement, visual description or other representation that was either false
or misleading. Second, the false or misleading representation must have been
knowingly made in connection with the sale, lease, rental or loan of goods or
services in the extension of credit or . . . collection of debts. Third, the conduct
complained of must have occurred in the regular course of the representer’s trade
or commerce. Fourth, the representation must have been of the type that may,
tends to or does, deceive or mislead any person.
Guidance Endodontics, LLC v. Dentsply Intern., Inc., 749 F.Supp.2d 1235 (2010) (internal
quotation marks omitted) (emphasis added) (quoting Stevenson v. Louis Dreyfus Corp., 1991-

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NMSC-051, 112 N.M. 97, 100, 811 P.2d 1308, 1311. “The gravamen of an unfair trade practice
is a misleading, false, or deceptive statement made knowingly in connection with the sale of goods
or services.” Diversey Corp. v. Chem-Source Corp., 1998-NMCA-112, ¶ 17, 125 N.M. 748.
Defendant claims that even assuming that misrepresentations were made to Plaintiffs in
connection with the August leak, they cannot have been made “in connection with” an insurance
policy that had already been sold to them and Plaintiffs therefore cannot sustain a claim under the
UPA. See Eisert v. Archdiocese of Santa Fe, 2009-NMCA-042, ¶¶ 22-28, 146 N.M. 179 (affirming
summary judgment for defendants where plaintiff offered no evidence that defendants made
knowing misrepresentations “at the time” services were contracted for).
Plaintiffs contend that New Mexico law holds that an actionable misrepresentation under
the UPA can be made after a sale of goods and services has been consummated as long as “it
occurred in connection with the commercial relationship for which the Defendant[s] were
compensated.” Maese v. Garrett, 2014-NMCA-072, ¶19, 329 P.3d 713. Plaintiffs’ understanding
of the law is accurate and is supported by both the legislative intent behind the statute as well as
its plain language. A viable UPA claim is not foreclosed by the fact that the alleged
misrepresentations took place after the sale of the policy. See Lohman v. Daimler-Chrysler Corp.,
2007-NMCA-100, ¶ 30, 142 N.M. 437, 443, 166 P.3d 1091, 1097. An “unfair or deceptive trade
practice” does not require “a misrepresentation in the course of a sale between plaintiff and
defendant; it merely requires that a misrepresentation be “made in connection with the sale . . . of
goods” generally. Id. (emphasis in original). The legislative intent of the UPA affords the statute
a broad enough scope “to encompass misrepresentations which bear on downstream sales by and
between third parties.” Id.; see also State ex rel. Stratton v. Gurley Motor Co., 105 N.M. 803, 808,

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737 P.2d 1180, 1185 (Ct.App.1987) (interpreting UPA “liberally to facilitate and accomplish its
purposes and intent.”).
In Maese v. Garrett, the New Mexico Court of Appeals held that misrepresentations made
after the sale of goods and services could support a claim under the UPA, specifically rejecting
previous decisions suggesting that the alleged misrepresentation had to be made in the course of
selling a product or services to the plaintiff. 2014-NMCA-072, ¶18. Defendant initially relied on
Maese to argue that Plaintiffs could not pursue a UPA claim based on a misrepresentation made
after the sale of the policy. After having been caught in what the Court considers to be a
misstatement of the law in Maese, Defendant abandoned its initial approach in the reply and
switched to the argument that Maese is factually distinguishable and therefore does not apply to
Plaintiffs’ UPA claim. Doc. 91 at 22. However, any factual distinctions do not change the blackletter statement of the law, which applies here as well as in Maese.
Having determined the relevant legal standard, the next question is to decide whether
Plaintiffs have presented any facts to dispute Defendant’s position that there is no evidence of
misrepresentation. The Court finds that Plaintiffs have done so:


Factual Disputes Regarding Grounds for Denial: Liberty sent Plaintiffs three letters
denying their claim: on October 3, 2015, March 21, 2016 and July 16, 2016. Doc. 100 at
12-13. The second and third letters contained different grounds for denial, and
abandoned some of the grounds previously cited. Liberty offered no explanation why the
grounds for denial in its earlier letters had been abandoned. Doc. 101 at 15.1
o For example, in its first denial letter, Liberty cited as grounds for the denial wear
and tear; inherent vice; wet or dry rot; and earth movement. However, Liberty
abandoned reliance on those exclusions in the second letter, relying instead on
totally different exclusions for damages caused by seepage, water damage and
settling—without any reason why there were now new reasons for denying
Plaintiff’s claim. A reasonable fact finder could view Liberty’s conduct as an

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The Court’s findings from previous decisions cite to specific facts which are omitted here for ease of reading. The
Court’s sole purpose here is to show that there are disputes of fact which remain on each of the claims on which
Defendant seeks summary judgment.

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actionable misrepresentation under the UPA, particularly here where the Court
has found disputes of fact as to whether coverage existed. See Doc. 101 at 15.


Factual Disputes Concerning Investigation of Claim: Liberty represented to Plaintiffs
that their claim would be on hold pending an additional investigative report, but there is
evidence that Liberty made the decision to deny the claim even before it received that
report. See Doc. 101 at 16.
o Evidence to support a finding of misrepresentation by omitting policy language
that would have meant that the Favas’ claim was covered, see Doc. 101 at 14 and
changing the policy language Liberty used to deny the claim without doing any
investigation to justify the change, see Doc. 100 at 8-9 and 13 (different “earth
movement" exclusion cited in third denial letter). This evidence could suggest to
a reasonable fact finder that Liberty failing to deliver the quality and quantity of
goods or services contracted for, which is proscribed under the UPA.
The evidence offered by Plaintiffs creates factual disputes on the UPA claim and therefore

Defendant is not entitled to summary judgment on this claim.
II.

Count III: Violation of New Mexico Insurance Code
A.

Viability of Claim If There is No Coverage

The New Mexico Unfair Insurance Practices Act, NMSA 1978 59A-16-20 (“UIPA”),
requires proof that the claims-handling conduct complained of was knowingly committed or
committed with such frequency that it constitutes a general business practice of the insurer. Such
conduct includes but is not limited to misrepresenting pertinent facts or policy provisions at issue;
and failing to promptly provide an insured a reasonable explanation for a denial of the claim.
Defendant argues that Plaintiffs cannot maintain their claims for violations of the UIPA if
there is no coverage under the Favas’ policy. Liberty made this same argument in its motion for
summary judgment on Plaintiffs’ bad faith claims (Doc. 69), and Plaintiffs had responded by
insisting that insurers can be held liable for bad faith insurance practices even where there is no
duty to pay under the policy. The Court found in favor of Liberty on this legal issue:
Plaintiffs are correct that under New Mexico law, bad faith claims may be based
on conduct separate from a refusal to pay, citing Progressive Cas. Ins. Co, 20186

NMSC-014, ¶ 24 and O’Neel v. USAA Ins. Co., 2002-NMCA-028, ¶9, 31 P.3d
356. However, these cases do not stand for the proposition that there can be viable
bad faith claims where there is no coverage under the policy;
Doc. 101 at 10. Plaintiffs now adopt the same stance with regard to their UIPA claim, arguing that
“[j]ust as a common-law bad faith claim can be based on a failure to fairly investigate a claim, the
UIPA prohibits certain specifically enumerated claims-handling practices by an insurance
company, independent of the insurer’s duty to pay a claim.” Doc. 77 at 21. However, they rely
on the same cases, Progressive Casualty and O’Neel, which doomed their argument with respect
to their bad faith claims and do not help them now, either. The absence of a duty to cover an
insurance claim removes the legal basis for a UIPA claim as well. See Certain Underwriters at
Lloyd’s London Subscribing Policy No. C111271/054 v. New Mexico Psychiatric Servs.
Corp.,(slip copy) 2015 WL 11670154, at *6 (D.N.M. Aug. 13, 2015) (rejecting insured’s argument
that she could proceed with bad claim in absence of underlying coverage).
However, the UIPA claim proceeds for the time being since the Court has found that
disputes of material fact exist on the coverage issue.
B.

Merits of UIPA Claim

There are genuine issues of material fact as to whether Liberty misrepresented policy
provisions relevant to the Favas’ claim for insurance coverage in its October 3, 2015, and March
16, 2016, denial letters:


Misquoting policy language on exclusions that was not included in denial letters. See Ex.
19 (Marc Hill Depo.) at 171-172 (acknowledging errors quoting policy language in denial
letters and stating that “[w]hether it conveyed the information correctly . . . would be an
interpretation thing. . . .”).



Liberty initially represented to Plaintiffs that Liberty would cover other water damage to
property, excluding plumbing expenses; and then denied the Favas’ claim because it
determined the damages to the Favas’ home were not covered because they were “water
damage.” Ex. 6 (Wearmouth Depo.) at 175:9-23; Ex. 33; Ex. 19 at 183:10-25; Pltffs’
Add’l Facts KK PMF SS.
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

Omission of language stating that there is coverage for loss caused by water, except for
certain specified conditions under section 2(e) of the policy. See Doc. 66-1, or Ex. A, at
11.2 This evidence creates a factual dispute over whether this language brings the
structural damage to the house within coverage. See Doc. 100 at 14.



Liberty told Plaintiffs that their claim was still being investigated and was “on hold”
pending Mr. Fava providing a report from an engineer, where Liberty had actually
decided to deny the claim before receiving the report. See Doc. 101 at 16.



Material factual disputes also exist over whether Liberty failed to provide Plaintiffs with
a reasonable explanation for a denial of the claim. The Court has already described
disputes surrounding the grounds for denial of Plaintiffs’ claim, where Liberty kept
shifting the reasons for denial set out in the denial letters.

C.

“General Business Practices” Under the UIPA
Defendant contends that Plaintiffs’ UIPA claim fails because there is no evidence that any of

the alleged conduct occurred with such frequency so as to constitute a “general business practice”
of the insurer, as is required for a claim brought under the UIPA. Plaintiffs, however, do provide
enough evidence to create factual disputes that support a claim:


Clarence Wearmouth, Liberty’s desk adjuster assigned to oversee the handling of
Plaintiffs’ claim, testified at his deposition that the way Liberty handled the Favas’ claim
conformed to how Liberty wanted claims handled in general. Wearmouth believed
Liberty handled the claim “great,” and that if presented with a similar claim Liberty
would handle it the same way it handled the Fava claim. Pltffs’ Add’l Fact FFF and supp.
exhs. (Ex. 6 at 181:1-183:17).
o Sal Collins, a field adjuster employed by Liberty had determined following his
inspection that the settling to the home was caused by the crack in the water line
and therefore fell within coverage under the policy. Ex. 24 at 93:10-17. However,
Wearmouth told Collins that the Favas’ claim would be denied and directed
Collins to write in his Claims Notes that “Shifting of the home is not a covered
peril” under the policy. Pltffs’ Add’l Fact I and supp. exh. (Ex. 24 at 93:10-27; at
98:12-17).
o Marc Hill, testifying on behalf of Liberty at a 30(b)(6) deposition, stated that the
way Liberty handled the Favas’ claim complies with the company’s general
business practices. Ex. 19 at 216:17-24.

2

The 2(e) exceptions from coverage include, but are not limited to: wear and tear; inherent vice; latent defect;
smog, rust or other corrosion; mold; wet or dry rot; settling; shrinking; bulging or expansion.

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Based on this evidence, Plaintiffs have presented disputes of fact regarding their UIPA
claim to survive summary judgment on that claim. Liberty does not take issue with the business
practices described by its witness, but disputes whether the UIPA violations alleged by Plaintiffs
are consistent with those practices. Such disputes will be considered by the jury and resolved at
trial.
D.

Whether Alleged Conduct Was “Knowingly” Committed

Defendant contends that the evidence shows that Liberty did not “knowingly commit” any
of the alleged violations under the UIPA. Plaintiffs claim that “knowingly commit” is synonymous
with “awareness” or “insight” as the term “knowingly made” is defined in connection with the
New Mexico Unfair Practices Act (“UPA”). See Stevenson v. Louis Dreyfus Corp., 1991-NMSC051, ¶ 17, 112 N.M. 97, 100. Defendant balks at the definition supplied by Plaintiffs, yet offers
nothing better and moves to dismiss the UIPA claim because Plaintiffs have not satisfied that
element.
The Court will not dismiss the UIPA claim simply because Defendant disagrees with
whether an element of the claim has been adequately defined—particularly when Defendant offers
no counter-definition for the Court to consider. Moreover, this issue need not be resolved now.
The UIPA prohibits certain practices by an insurer that are “knowingly committed or performed
with such frequency as to indicate a general business practice. . . .” N.M. Stat. Ann. §59A-16-20
(emphasis added). As explained above, Plaintiffs have presented sufficient evidence regarding the
“general business practice” alternative to proceed on this claim.
The Court therefore finds that Plaintiffs have presented sufficient evidence to preclude
summary judgment on the merits of their UIPA claim.
III.

Count IV: Negligence

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Defendant contends Plaintiffs do not have any claims based on negligence because there is
no cognizable cause of action for negligence in an insurance context. For this argument, Defendant
relies on Ambassador Insurance Co. v. St. Paul Fire & Marine Insurance Co., where the New
Mexico Supreme Court held that New Mexico does not recognize a cause of action against an
insurer for negligent failure to settle. 1984-NMSC-107, ¶ 13, 102 N.M. 28. Liberty acknowledges
that there is no New Mexico case addressing specially whether an insured has a negligence claim
against an insurer related to investigation and handling of insurance claims, separate and apart
from a statutory claim or a bad faith claim. Nevertheless, Defendant argues that the reasoning and
holding of Ambassador is relevant to Plaintiffs’ claim. Plaintiffs contend that the facts in
Ambassador deal with a failure to settle a third-party claim, and so the case is not relevant here.
The Court agrees with Liberty on this sole legal question for two reasons, which the Court
discusses next.
A.

Relevance of the Ambassador Case

The New Mexico Supreme Court started out its analysis in Ambassador recognizing the
general rule that only those obligations contained in an insurance agreement are imposed upon the
parties to that agreement. Ambassador, 1984-NMSC-107, ¶ 11, 102 N.M. 28, 30; see Safeco Ins.
Co. of Am., Inc. v. McKenna, 90 N.M. 516, 520 (1977) (“An insurer’s obligation to its insured is
contractual and must “be determined by the terms of the policy.”). Thus, imposing a negligence
standard on the insurer would impose a duty that is not expressly provided for in the contract, with
the exception of an insurer’s additional duty to carry out its duties under the contract in “good
faith.” Id., 1984-NMSC-107, ¶ 11, 102 N.M. 28, 30. However, the court considered that this “good
faith” duty incorporates the elements of a negligence claim so that a separate negligence claim
against the insurer did not exist:

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Thus, when failure to settle the claim stems from a failure to properly investigate
the claim or to become familiar with the applicable law, etc., then this is
negligence in defending the suit (a duty expressly imposed upon the insurer under
the insurance contract) and is strong evidence of bad faith in failing to settle.
Here, basic standards of competency can be imposed, and the insurer is charged
with knowledge of the duty owed to its insured. In this sense, such negligence
becomes an element tending to prove bad faith, but not a cause of action in and of
itself. However, “where an insurer acts honestly and in good faith on adequate
information, it should not be held liable for excess liability due to its failure to
reach a settlement.”
Ambassador, 1984-NMSC-107, ¶ 12, 102 N.M. 28, 31 (emphasis in original). The court also noted
that an insurer’s failure to settle is not actionable unless the failure is due to a lack of good faith.
Id., 1984-NMSC-107, ¶ 18, 102 N.M. 28, 33. The court’s reasoning in Ambassador is not restricted
to its facts, and the language cited above from the case supports the following: (1) an insurer has
a duty to perform in “good faith” all of the duties contained in the insurance contract; (2) an
insurer’s duties are those expressly contained in the insurance contract; and (3) in the insurance
context, negligence is an element of bad faith rather than a separate claim against the insurer. See
Ambassador, 1984-NMSC-107, ¶ 12, 102 N.M. 28, 31 (“. . . negligence becomes an element
tending to prove bad faith, but not a cause of action in and of itself”).
The Ambassador case is therefore applicable to this case in its reasoning, if not its facts.
B.

Plaintiffs Have Not Supported Their Position With Caselaw

Plaintiffs contend that Ambassador is distinguishable and inapplicable (a contention with
which this Court disagrees), yet they present no case law to support their position that negligence
claims can be asserted against an insurer separate from a statutory or bad faith claim. They do
offer one case, Charter Serv. v. Principal Mut. Life Ins. Co., where the New Mexico Court of
Appeals recognized that negligent misrepresentation claims can be asserted against an insurer.
1994-NMCA-007, 117 N.M. 82, Charter does not assist Plaintiffs at all, because Plaintiffs are
not alleging negligent misrepresentation by Liberty—they are asserting instead a simple garden11

variety negligence claim.3 Moreover, Charter’s language is not inconsistent with Ambassador’s
finding that the element of negligence is subsumed within statutory and bad faith claims. Charter,
1994-NMCA-007, ¶ 10, 117 N.M. 82, 86 (“Negligent misrepresentation is an action governed by
the general principles of the law of negligence.”).
Plaintiffs have not presented a reason to discount Ambassador, nor have they provided any
legal basis to allow their negligence claim to proceed. See also Ambassador Ins. Co. v. St. Paul
Fire & Marine Ins. Co., 753 F.2d 824, 826 (10th Cir. 1985) (holding, after certifying questions to
the New Mexico Supreme Court, that district court correctly concluded that New Mexico does not
recognize a cause of action for negligent failure to settle and citing to New Mexico cases “referring
to the duty between insurer and insured as one of good faith”).4 Negligence is element of the bad
faith and statutory claims asserted by Plaintiffs but cannot be maintained as a separate and
independent claim in this lawsuit. Accordingly, Plaintiffs’ negligence claim in Count IV will be
dismissed as not legally supportable.
CONCLUSION
In sum, the Court finds and concludes that disputes of material fact exist on Plaintiffs’
claims brought under the New Mexico Unfair Practices Act, NMSA 1978 §§57-12-16 and the New
Mexico Unfair Insurance Practices Act, NMSA 1978 59A-16-20 (Counts II and III). Therefore,
Defendant is not entitled to summary judgment on these claims.

3

Count IV asserts the black-letter elements of a simple negligence claim: (1) that Liberty “breached the standard of
care required of an insurance company investigating and handling claims for insurance coverage in New Mexico;
and that (2) the alleged negligence caused damages to Plaintiffs. While the negligence claim cannot stand alone, the
allegations in Count IV back up Plaintiffs’ claims based on a failure to investigate and bad faith claim against
Liberty. The Court’s conclusion here is supported by the holdings in both Ambassador and Charter. See Doc. 1-3
(First Am. Compl.) at 24, ¶¶65-68.
4

This Tenth Circuit decision is an appeal from a separate Ambassador lawsuit.

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However, Defendant is entitled to summary judgment on the negligence claim asserted in
Count IV because the Court finds that it is legally not supportable under New Mexico law.
Except for Plaintiffs’ negligence claim, which shall be dismissed, the Court has found that
material issues of fact exist on every one of the claims asserted by Plaintiffs in this case. See
Docs. 99, 100, 101. This case shall therefore proceed to trial on Counts I, II and III.
THEREFORE,
IT IS ORDERED that Defendant’s Motion for Summary Judgment on Plaintiffs’
Statutory Claims and Negligence (Counts II, III and IV) (Doc. 68) is therefore DENIED as to the
claims asserted under the New Mexico Unfair Practices Act and the New Mexico Unfair Insurance
Practices Act in Counts II and III; and GRANTED with regard to the negligence claim asserted in
Count IV.

_________________________________________
CHIEF UNITED STATES DISTRICT JUDGE

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