OR&L Constr., L.P. v. Mountain States Mut. Cas. Co.

• Decision Date: 25 April 2022
• Docket Number: A-1-CA-38977
• Parties: OR&L CONSTRUCTION, L.P., Plaintiff-Appellant, v. MOUNTAIN STATES MUTUAL CASUALTY COMPANY, Defendant-Appellee.
• Court: Court of Appeals of New Mexico

514 P.3d 40

OR&L CONSTRUCTION, L.P., Plaintiff-Appellant,

v.MOUNTAIN STATES MUTUAL CASUALTY COMPANY, Defendant-Appellee.

No. A-1-CA-38977

Court of Appeals of New Mexico.

Filing Date: April 25, 2022

The Furth Law Firm, P.A., Ben Furth, Paul Hibner, Las Cruces, NM, for Appellant

Modrall, Sperling, Roehl, Harris & Sisk, P.A., Tim L. Fields, Jeremy K. Harrison, Albuquerque, NM, for Appellee

MEDINA, Judge

{1} Plaintiff OR&L Construction, L.P. (OR&L) appeals the district court's grant of summary judgment in favor of Defendant Mountain States Mutual Casualty Insurance Company (Mountain States). OR&L contends that the district court erred by entering summary judgment in Mountain States’ favor and should have granted summary judgment in OR&L's favor; the district court should have applied the "mend the hold" doctrine to prevent Mountain States from changing its reason for denying OR&L's claim for coverage; the district court erred in dismissing OR&L's claims for breach of the implied covenant of good faith and fair dealing and violations of the Unfair Practices Act (UPA), NMSA 1978, § 57-12-2 (2009, amended 2019), and the Unfair Insurance Practices Act (UIPA), NMSA 1978, § 59A-16-20 (1997) ; the district court erred by holding OR&L had notice of its policy's exclusions as a matter of law; and the district court erred by holding OR&L suffered no damages as a matter of law. OR&L also argues that the district court erred in awarding attorney fees and costs to Mountain States.

{2} We affirm and clarify two aspects of the implied covenant of good faith and fair dealing. First, we hold that the reasonable expectations doctrine is a judicial doctrine, and an insurer does not violate the implied covenant if it does not consider an insured's reasonable expectations of coverage when processing claims. Second, we hold that an insurer's good faith duty to investigate ends after it determines a claim is not covered under the terms of an insured's policy, and thus a failure to investigate beyond the terms of the policy does not violate the implied covenant.

BACKGROUND

{3} OR&L is a construction business that conducts, among other things, roof repair, including "torch-down" roofing—a technique which uses a flaming torch to heat and seal tar paper onto a roof. OR&L sought a general commercial liability policy through insurance broker Pat Campbell Insurance, LLC (Pat Campbell) that would cover all its operations, including torch-down roofing. Mountain States does not sell insurance directly to the public, and instead authorizes brokers, like Pat Campbell, to sell its insurance products. Through Pat Campbell, OR&L obtained a Mountain States general commercial liability insurance policy.

{4} In February 2016, Mountain States transmitted a complete copy of OR&L's policy to Pat Campbell. The complete policy contained two exclusions, "Designated Work" and "Designated Ongoing Operations," which specifically precluded coverage for damage caused by torch-down roofing. Pat Campbell then sent a ten-page "Commercial Package Policy" document to OR&L. The ten-page document contained a two-page forms list which identified several forms included in OR&L's policy, including several exclusions. Pat Campbell did not read the complete policy and failed to discover the torch-down roofing exclusion. OR&L reviewed the ten-page policy document and the list of forms identifying the exclusions, but believed it acquired coverage for torch-down roofing based on Pat Campbell's representations.

{5} In March 2016, a fire occurred at a home while OR&L was performing torch-down roofing. OR&L submitted a claim for coverage to Mountain States, believing that its policy covered damage caused by such an incident. Shortly after, OR&L participated in two phone calls with Mountain States claims adjuster Kimberly Kroner to discuss the fire. During the first call, OR&L informed Ms. Kroner that the fire occurred while OR&L was performing torch-down roofing, and Ms. Kroner replied that OR&L's policy contained a torch-down roofing exclusion. OR&L informed Ms. Kroner it was unaware the policy excluded torch-down roofing and that it had only received a ten-page policy document from Pat Campbell. Ms. Kroner ended the first call and discussed the exclusion with Mountain States’ chief underwriting officer, who informed her the exclusion was valid. Ms. Kroner then made a second call to inform OR&L that the policy exclusion was valid and that OR&L had no coverage for a fire caused by torch-down roofing. A week later, Ms. Kroner sent OR&L a letter officially denying coverage due to the torch-down roofing exclusion. Mountain States did not investigate whether Pat Campbell had provided OR&L with a complete copy of the policy and believed that OR&L did not have the complete policy. OR&L subsequently sued Mountain States and Pat Campbell in May 2016.

{6} In August 2016, OR&L received a demand for payment from the homeowner's insurance company. Pat Campbell purchased the homeowner's demand through a July 2017 settlement agreement. In July 2018, OR&L and Pat Campbell entered into a second settlement agreement in which Pat Campbell agreed in part to pay OR&L's attorney fees related to litigation between Pat Campbell and OR&L, and extinguish the homeowner's demand in exchange for OR&L releasing all its claims against Pat Campbell. In exchange, OR&L agreed not to pursue further legal action against Pat Campbell for any cause of action arising from the fire.

{7} After settling with Pat Campbell, OR&L filed a third amended complaint which solely asserted claims against Mountain States. OR&L sought relief for alleged violations of the UPA, breach of contract and breach of the implied covenant of good faith and fair dealing, and violations of the UIPA. OR&L also sought reformation of OR&L's policy to strike the torch-down roofing exclusion and damages.

{8} Mountain States answered the complaint and asserted a counterclaim against OR&L, requesting a declaratory judgment due to the policy's exclusion of losses arising from torch-down roofing. In support of its counterclaim, Mountain States alleged that OR&L had actual or constructive notice of the exclusion because the complete policy had been provided to Pat Campbell, and inquiry notice of the torch-down roofing exclusion from the ten-page policy document Pat Campbell provided to OR&L. OR&L subsequently filed a motion in limine asserting that Mountain States mended its hold because Mountain States had initially denied OR&L's coverage claim due to the torch-down roofing exclusion, not OR&L's notice of the exclusion.

{9} The parties filed and briefed several motions for summary judgment. In a detailed order, the district court granted summary judgment to Mountain States, finding that Mountain States had disclosed the torch-down roofing exclusion to OR&L. The district court found that the ten-page policy document OR&L received reasonably informed OR&L of its rights and obligations and that there were exclusions in the policy. Thus, per Young v. Seven Bar Flying Service, Inc. , 1984-NMSC-069, 101 N.M. 545, 685 P.2d 953, OR&L had notice of the exclusions as a matter of law, and the documents supplied to OR&L would allow Mountain States to rely on the torch-down roofing exclusion.

{10} The district court also found that OR&L's release of Pat Campbell was an alternate basis for granting summary judgment to Mountain States. OR&L's expectation of coverage was directly attributable to Pat Campbell, not Mountain States, and Mountain States could only be held vicariously liable for Pat Campbell's acts and omissions. The district court found that because Pat Campbell was acting as an agent for Mountain States when it delivered the policy to OR&L and OR&L released Pat Campbell, no liability could be imputed to Mountain States for Pat Campbell's acts or omissions.

{11} The district court also dismissed OR&L's claims for breach of the implied covenant of good faith and fair dealing and violations of the UPA and UIPA. Regarding OR&L's expectations of coverage, the district court found that the reasonable expectations doctrine is a judicial remedy, and that Mountain States therefore had no duty to consider OR&L's reasonable expectations of coverage. The district court also found that Mountain States did not breach the implied covenant or violate its duty to investigate the cause of the fire because the scope of an insurer's investigation is limited to the facts and circumstances of the loss and does not encompass the insured's expectations of coverage. Additionally, the district court found Mountain States had no obligation to attempt to settle due to its good faith belief that OR&L's policy did not cover its loss from the fire.

{12} Regarding OR&L's motion in limine, the district court found that Mountain States did not mend its hold. The district court found that the doctrine did not preclude Mountain States from further explaining the basis of its claims decision or responding to legal arguments and that explaining how a policy exclusion was enforceable was not mending the hold.

{13} Because Pat Campbell had purchased the homeowner's claim against OR&L, the district court found that OR&L was in the position it expected to be when it sought coverage for torch-down roofing and suffered no damages. Finally, the district court found that OR&L either chose not to do available work due to the litigation, which would be a failure to mitigate, or there was no work available meaning there could be no lost profits. Because the availability of work and whether that work was declined was in dispute, the district court denied summary judgment on the issue of mitigation, but noted that its other rulings fully resolved the case and no issues were preserved for trial.

{14} In a separate order, the district court found that Mountain States was entitled to its fees and costs and overruled all of OR&L's objections to Mountain States’ cost bill, awarding Mountain States $53,465.82 in fees and...