State ex rel. Udall v. Colonial Penn Ins. Co.

• Decision Date: 08 May 1991
• Docket Number: 19268,Nos. 19052,s. 19052
• Citation: 112 N.M. 123,1991 NMSC 48,812 P.2d 777
• Parties: STATE of New Mexico, ex rel. Tom UDALL, Attorney General, Plaintiff-Appellant, v. COLONIAL PENN INSURANCE CO., Fireman's Fund Insurance Co., American Fund Insurance Co., Defendants-Appellees. and STATE of New Mexico, ex rel. Tom UDALL, Attorney General, Plaintiff-Appellant and Cross-Appellee, v. DEAN WITTER REYNOLDS, INC., Defendant-Appellee and Cross-Appellant.
• Court: New Mexico Supreme Court

Page 777

812 P.2d 777

112 N.M. 123

STATE of New Mexico, ex rel. Tom UDALL, Attorney General, Plaintiff-Appellant, v. COLONIAL PENN INSURANCE CO., Fireman's Fund Insurance Co.,

American Fund Insurance Co.,

Defendants-Appellees.

and

STATE of New Mexico, ex rel. Tom UDALL, Attorney General, Plaintiff-Appellant and Cross-Appellee, v. DEAN WITTER REYNOLDS, INC., Defendant-Appellee and Cross-Appellant.

Nos. 19052, 19268.

Supreme Court of New Mexico.

May 8, 1991.

Rehearing Denied July 17, 1991.

Tom Udall, Atty. Gen., G.T.S. Khalsa, Asst. Atty. Gen., Santa Fe, for appellant.

Eaves, Darling & Porter, John M. Eaves, Albuquerque, for appellee Dean Witter Reynolds.

Montgomery & Andrews, William C. Madison, Neils L. Thompson, Albuquerque, for appellee Fireman's Fund.

Beall, Pelton, O'Brien & Brown, Gregory L. Beihler, Albuquerque, Jennings, Kepner & Haug, Phoenix, for appellee Colonial Penn.

OPINION

BACA, Justice.

The state appeals from summary judgment granted in two lawsuits that have been consolidated on appeal. In appeal number 19,052 we affirm the summary judgment granted in favor of three insurers, defendants-appellees Colonial Penn Insurance Company (Colonial), Fireman's Fund Insurance Company, and American Insurance Company (the latter two responded together and are jointly referred to as "Fireman's Fund"). In appeal number 19,268 the state appeals summary judgment entered in favor of Dean Witter Reynolds, Inc. (Dean Witter), and we reverse.

On April 26, 1984, the State Investment Officer, Philip Troutman, purchased 75,000 shares of stock in Schlumberger, Inc. After placing the order, Troutman became aware that Schlumberger was not a United States corporation; in fact it was incorporated in the Netherlands Antilles, although it did business in the United States. Believing this investment may have been contrary to New Mexico law, Troutman contacted the attorney general's office on April 27th. That office advised Troutman to deal with the stock using the mandated prudent man test and on June 21st issued an opinion that the purchase was illegal. The stock was sold in 1986--the state claims a loss of approximately $1.2 million.

The state and Dean Witter had entered into a professional services contract dated September 28, 1983, whereby Dean Witter would advise the State Investment Council and Officer regarding investment of the equity portion of the State Permanent Fund and Severance Tax Fund. It is alleged that Dean Witter advised the state to purchase Schlumberger stock and that Dean Witter knew of the limitations on stock purchases.

The three insurance companies issued public employee blanket bonds covering New Mexico state employees, including Troutman, for unfaithful performance of their duties. In September 1985 the state notified appellees of potential claims on the bond arising out of the Schlumberger transaction. Colonial denied the claim in October. Relying on time-to-sue provisions in the contracts, the other insurers also denied the claim, in November 1988.

I. NONPAYMENT ON THE PERFORMANCE BONDS--THE INSURERS.

A. Time-to-sue provisions do not violate public policy.

The bond contracts all contained provisions similar to the following:¹

This endorsement shall be deemed cancelled as to any Employee: (a) Immediately upon discovery by the Insured of any act on the part of such Employee which would constitute a liability of the Company under the applicable Insuring Agreement covering such Employee[.]

....

No suit, action or proceeding of any kind to recover on account of loss under this endorsement shall be brought after the expiration of three years from the cancellation of this endorsement as an entirety provided, however, that if such limitation for bringing suit, action or proceeding is prohibited or made void by any law controlling the construction of this endorsement, such limitation shall be deemed to be amended so as to be equal to the minimum period of the limitation permitted by such law.

The state contends the time-to-sue provisions as asserted against the sovereign violate public policy and should be declared void. Our courts consistently have held that contractual limitations on actions, including time-to-sue provisions, will be enforced unless they violate public policy. See, e.g., Green v. General Accident Ins. Co. of Am., 106 N.M. 523, 525, 746 P.2d 152, 154 (1987); Diebold Contract Servs., Inc. v. Morgan Drive Away, Inc., 95 N.M. 9, 11, 617 P.2d 1330, 1332 (Ct.App.1980). We reaffirm the principle that limitations on actions that violate public policy are unenforceable, but hold that the case at bar does not present such public policy considerations to require us to negate a contractual provision.

The state argues that preservation of the public fisc constitutes a strong public policy violated by a limitation on the time to sue and refers to a line of authority holding that statutes of limitations cannot be asserted against the state to defeat a claim. See, e.g., Ross v. Daniel, 53 N.M. 70, 201 P.2d 993 (1949); State v. Roy, 41 N.M. 308, 68 P.2d 162 (1937). Such limits cannot be asserted against the state unless the statute expressly includes the state within its ambit, or the legislative intent is such that by clear implication the state is included. Ross, 53 N.M. at 75, 201 P.2d at 996; Roy, 41 N.M. at 312-13, 68 P.2d at 164-65.

A statute of limitations, however, differs from the provisions at issue in the instant case. The time-to-sue provisions are contractual clauses agreed to between the state and the insurers to apply to a specific issue. As such they more closely resemble a statute of limitations that by its terms expressly is applied against the state than a statute of general applicability.

The provisions also present a countervailing public policy consideration--the freedom to contract.

New Mexico ... has a strong public policy of freedom to contract that requires enforcement of contracts unless they clearly contravene some law or rule of public morals. "Great damage is done where businesses cannot count on certainty in their legal relationships and strong reasons must support a court when it interferes in a legal relationship voluntarily assumed by the parties."

United Wholesale Liquor Co. v. Brown-Forman Distillers Corp., 108 N.M. 467, 471, 775 P.2d 233, 237 (quoting City of Artesia v. Carter, 94 N.M. 311, 314, 610 P.2d 198, 201 (Ct.App.), cert. denied, 94 N.M. 628, 614 P.2d 545 (1980)). This court has previously enforced contractual provisions against the state to the detriment of the sovereign. See, e.g., Vinnell Corp. v. State, 85 N.M. 311, 512 P.2d 71 (1973) (state liable to construction contractor for increased costs caused by misleading specifications on theory of breach of implied warranty of correctness). We also have rejected the argument that a public contract should be construed liberally in favor of the public interest when to do so would be unreasonable and require abrogation of accepted rules of contract interpretation. Schultz & Lindsay Constr. Co. v. State, 83 N.M. 534, 536, 494 P.2d 612, 614 (1972).²

The state, nonetheless, contends that the provisions at issue were neither bargained for nor essential to the agreement and asserts, therefore, that the public interest inherent in the doctrine that statutes of limitations should not apply against the state outweighs the policy in favor of freedom to contract. Stated another way, if a time-to-sue provision is analogous to a statute of limitations that expressly includes within its purview the state, because the provision was not bargained for, the state has not consented to be governed by it. We find no evidence to support this contention. See Koenig v. Perez, 104 N.M. 664, 726 P.2d 341 (1986) (after movant makes out a prima facie showing for summary judgment, burden shifts to opposing party to show reasonable doubt). "Generally, a party who executes and enters into a written contract with another is presumed to know the terms of the agreement, and to have agreed to each of its provisions in the absence of fraud, misrepresentation or other wrongful act of the contracting party." Smith v. Price's Creameries, 98 N.M. 541, 545, 650 P.2d 825, 829 (1982). The state has offered no evidence to demonstrate that the contract was unconscionable or one of adhesion, or that it was in an unequal bargaining position with the insurers. Cf. Guthmann v. La Vida Llena, 103 N.M. 506, 709 P.2d 675 (1985); Albuquerque Tire Co. v. Mountain States Tel. and Tel. Co., 102 N.M. 445, 697 P.2d 128 (1985). In Sanchez v. Kemper Insurance Cos., 96 N.M. 466, 467, 632 P.2d 343, 344 (1981), we noted several policy reasons for time-to-sue provisions, including removal of uncertainty regarding the insurer's liability. Such a provision is an essential element of the bond contract and forms part of the bargain. Even if, as the state claims, it did not negotiate actively over the provisions, the limitations on the right to sue were part of the agreement and represented an element of the consideration.³

B. Fireman's Fund is not estopped.

Although it did not deny the claim until 1988, Fireman's Fund is not estopped from asserting the time-to-sue provisions. The state refers us to authority for the proposition that a time-to-sue provision is tolled in the period between the insurer's notice of the claim and its denial. See Solomon Lieberman and Chevra Lomdei Torah v. Interstate Fire and Casualty Co., 768 F.2d 81 (3rd Cir.1985); Ford Motor Co. v. Lumbermens Mut. Casualty Co., 413 Mich. 22, 319 N.W.2d 320 (1982). This rule has not achieved universal acceptance. See International School Servs., Inc. v. Northwestern Nat'l Ins. Co., 710 F.Supp. 86 (S.D.N.Y.1989) (choice of law question presented by assertion of tolling issue). The facts presented, however, render that authority inapposite, and we express no opinion on that issue. The state gave Fireman's Fund notice of an act constituting potential liability in 1985--the state does...