Opinion ID: 2512184
Heading Depth: 3
Heading Rank: 2

Heading: the authority's claim is for professional negligence

Text: {13} This case first asks us to decide what type of claim a client may bring against a professional, when the professional's breach of contract or breach of duty causes the client to suffer an injury to a third party to whom the professional is not liable. The Authority contends that even though Gallagher did not injure Moriarty, it may nonetheless seek indemnity from Gallagher for the amount the Authority paid Moriarty that was allegedly Gallagher's fault. Gallagher contends that the Authority is restricted to either a breach of contract or a professional negligence claim. We agree with Gallagher. {14} The arguments of both the Authority and Gallagher are motivated by the application of the statute of limitation to these types of claims. If the claim is for indemnity, the Authority argues that the statute of limitation did not begin running until it paid the arbitration award to Moriarty in December 2004, and thus its claim is not barred. The Authority's fallback position, in case its indemnity claim fails, is that its negligence action did not accrue until the Moriarty arbitration was resolved. Gallagher argues that if the claim is malpractice, the statute of limitation accrued at the latest when Moriarty filed suit against the Authority in 1996, and therefore it is now barred. Gallagher also argues that no matter how the Authority labels its claim, it is barred by the statute of limitation for malpractice actions. To the extent that this argument asks us to clarify the difference(s), if any, between statutes of limitation for indemnity and professional negligence claims, we need not and do not address it because we hold that the Authority's claim is for professional negligence. {15} Set against the backdrop of the statute of limitation, the particular facts of this case demonstrate the difficulty in determining whether the Authority's claim should be one for indemnity or negligence. On the one hand, the Authority seeks reimbursement for losses it paid to Moriarty that were allegedly caused by Gallagher. Therefore, it may not be appropriate to require the Authority to have brought an action to recover those losses before its legal obligation to Moriarty was imposed, that is, before the issuance of the arbitrator's decision. On the other hand, the Authority's complaint demonstrates that its action is founded on the breach of Gallagher's duty or contract, and therefore should conceivably be brought in accordance with the statutes of limitation applicable to those claims. To resolve this dispute, we must determine when the Authority suffered harm and to whom that harm is allegedly attributable. {16} The Authority argues that it has stated a claim for indemnity on theories of express contract, implied warranty, and derivative liability. Under each theory, the Authority claims that Gallagher should reimburse it for the entire amount it paid Moriarty as a result of Gallagher's alleged negligence that was not attributable to any fault on the Authority's part. We address each argument in turn.
{17} Actions for indemnity may arise from an express or implied contract to indemnify. In re Consol. Vista Hills Retaining Wall Litig., 119 N.M. 542, 546, 893 P.2d 438, 442 (1995) ( Vista Hills ). But see NMSA 1978, §§ 56-7-1 to -3 (1971, as amended through 2007) (voiding indemnity agreements in certain situations). Although the Authority argues that its contract with Gallagher is sufficient to support a claim for contractual indemnity, it did not allege in its amended complaint that its contract contained either an express or implied contract to indemnify. Instead, the Authority has only alleged that Gallagher agreed to procure appropriate insurance coverage that would substantially fulfill the parties' intentions. Because the Authority did not allege that Gallagher expressly or impliedly contracted to indemnify it, the district court did not err in granting Gallagher's motion to dismiss the Authority's claim on this ground.
{18} In the absence of an express or implied agreement to indemnify, the Authority asserts that its agreement with Gallagher included an implied warranty on Gallagher's part to indemnify it against losses arising from the London policies. We take the Authority's argument to mean that Gallagher's warranty to use reasonable skill, a warranty implicit in all professional services contracts, includes a warranty for indemnification. We disagree. {19} When professional services provided pursuant to a contract are substandard, a plaintiff may bring a cause of action for malpractice or for breach of contract arising from the breach of the implied warranty to use reasonable skill. Adobe Masters, Inc. v. Downey, 118 N.M. 547, 548, 883 P.2d 133, 134 (1994). Whether a plaintiff sues for malpractice or for breach of contract, the standard of care is the same and is measured by the duty to apply the knowledge, care, and skill of reasonably well-qualified professionals practicing under similar circumstances. Id. We found no authority supporting the proposition that a professional services agreement should include an implied warranty of indemnity for losses paid to a third party when the professional who provided those services is not also directly liable to the third party for its injuries. {20} We are aware, however, that New Mexico case law allows a party to recover all damages resulting from an agent's or broker's erroneous failure to procure coverage that he or she undertook to provide. See, e.g., Sanchez v. Martinez, 99 N.M. 66, 69-70, 653 P.2d 897, 900-01 (Ct.App.1982) (an insurance broker who undertakes to provide but negligently fails to procure insurance may be held liable for any damage resulting therefrom in breach of contract or negligence action). However, we again could not find any authority extending the principle elucidated in Sanchez to actions for indemnity. Therefore, we reject the Authority's argument that its professional services contract with Gallagher contained an implied warranty of indemnity.
{21} The Authority's chief argument is that because its claim was contingent upon the outcome of the Moriarty arbitration, it has stated a claim for equitable indemnity based on Gallagher's derivative liability to it. In other words, the Authority argues that until the arbitrator determined that the London policies, as allegedly negligently drafted by Gallagher, subjected the Authority to liability to Moriarty, the Authority had no viable cause of action against Gallagher. As a result, according to the Authority, its claim for indemnification from Gallagher for the losses it paid to Moriarty should be allowed because Gallagher's liability to the Authority was derivative of the outcome of the Moriarty arbitration. {22} Actions for indemnity may arise without agreement and by operation of law to prevent an unjust, unsatisfactory, or inequitable result. Vista Hills, 119 N.M. at 546, 893 P.2d at 442 (citation omitted); Yelin v. Carvel Corp., 119 N.M. 554, 556, 893 P.2d 450, 452 (1995). Among the various situations in which New Mexico courts have applied equitable indemnity, we have allowed indemnification in actions for vicarious or derivative liability, as when an employer must pay for the negligent conduct of its employee under the doctrine of respondeat superior or when a person is directed by another to do something that appears innocent but is in fact wrongful. Vista Hills, 119 N.M. at 546, 893 P.2d at 442. See also Yelin, 119 N.M. at 556, 893 P.2d at 452 (listing other situations in which equitable indemnity may apply). For example, a blameless employer [as indemnitee] recovers from a negligent employee [as indemnitor], after the employer has been held liable to the injured third person upon the theory of respondeat superior. Dessauer v. Mem'l Gen. Hosp., 96 N.M. 92, 97, 628 P.2d 337, 342 (Ct.App.1981) (quotation marks and citation omitted). Therefore, actions for equitable indemnification based on the indemnitor's derivative liability to the indemnitee are allowed in New Mexico in certain situations. {23} We have also recognized actions for both traditional and proportional equitable indemnification. See Otero v. Jordan Rest. Enters., 1996-NMSC-047, ¶ 14, 122 N.M. 187, 922 P.2d 569 (recognizing traditional indemnification in vicarious liability context); Vista Hills, 119 N.M. at 551-53, 893 P.2d at 447-49 (establishing proportional indemnification as an equitable doctrine in certain situations). Traditional indemnification grants the person who has been held liable for another's wrongdoing an all-or-nothing right of recovery from a third party, such as the primary wrongdoer. Vista Hills, 119 N.M. at 545, 893 P.2d at 441. When applicable, proportional indemnification allows a defendant to seek partial recovery from another for his or her fault. Id. at 552, 893 P.2d at 448. Because the Authority seeks reimbursement for all of its losses to Moriarty, its claim, if valid, would be one for traditional equitable indemnification. {24} New Mexico courts recognize actions for traditional equitable indemnification only when the indemnitor and the indemnitee have a pre-existing legal relationship apart from the joint duty they owe the injured party. Id. at 545-46, 893 P.2d at 441-42. A relationship where the indemnitor owes a duty either in contract or tort to the indemnitee is sufficient to satisfy this requirement. Id. (citing Peak Drilling Co. v. Halliburton Oil Well Cementing Co., 215 F.2d 368, 370 (10th Cir.1954)). Thus, the Authority's allegation that Gallagher breached a duty owed to the Authority by negligently drafting the London policies is sufficient to satisfy this requirement. {25} Another requirement to bring an action for traditional equitable indemnification is that both the indemnitee and the indemnitor must be liable to the injured party. See, e.g., Vista Hills, 119 N.M. at 545-46, 893 P.2d at 441-42 (discussing traditional indemnification principles when two defendants have a joint duty to the injured party). Indeed, in Vista Hills this Court cited Restatement (Second) of Torts § 886(B) (1977) as authority for what situations may give rise to a right to indemnification. 119 N.M. at 546, 893 P.2d at 442. That section of the Restatement allows indemnification only when two persons are liable in tort to a third person for the same harm and one of them discharges the liability of both. Restatement (Second) of Torts § 886(B)(1). Also, when we have stated that [t]he purpose of traditional indemnification is to allow a party who has been held liable without active fault to seek recovery from one who was actively at fault[,] we have done so in the context of discussing the indemnitor's fault to the injured party. Vista Hills, 119 N.M. at 546, 893 P.2d at 442. Our current law, therefore, recognizes equitable indemnity only in cases where both the indemnitor and the indemnitee are liable to the injured party. {26} Gallagher points to this critical flaw in the Authority's complaintthat it has not alleged that Gallagher was also liable to Moriartyas evidence that it has not stated a claim for indemnification. We agree. The Authority has not alleged that Gallagher is solely or jointly liable to Moriarty for any injury arising from the London policies. In fact, the complaint demonstrates that Gallagher's alleged negligence actually benefitted Moriarty by requiring the Authority to pay Moriarty for its crime losses instead of denying coverage under the London policies. Further, the Authority has not alleged that Gallagher and the Authority owed a joint duty to Moriarty to provide the allegedly agreed-upon coverage. Therefore, despite its pre-existing legal relationship with Gallagher, the Authority has not stated a claim for equitable indemnity based on Gallagher's derivative liability to it because the purported indemnitee (the Authority) and the indemnitor (Gallagher) are not both liable to Moriarty for its injury. {27} Nevertheless, relying on language in Vista Hills, the Authority claims that equitable indemnity actions are appropriate when (1) the indemnitor and the indemnitee have an express or implied contractual relationship of any kind; (2) the indemnitee is not at fault for the injury; and (3) allowing an indemnity claim would prevent the unjust enrichment of the indemnitor. However, the Authority reads Vista Hills too broadly and appears to ignore the distinction between claims for indemnification based on a contract to indemnify and those based in equity. {28} To state a claim for indemnification based on a contract to indemnify, it is not always necessary for the indemnitor to be liable to the injured third party. For example, in insurance agreements where the insurer indemnifies the insured for losses he or she suffers because of his or her own negligence, the insurer is not liable to the injured party. However, as discussed above, to state a claim for equitable indemnification, the indemnitor must be at least partly liable to the original plaintiff for his or her injuries. See Restatement (Second) of Torts § 886(B)(1). If we held otherwise and allowed claims for equitable indemnity to go forward when an indemnitor was not liable to the injured party, we would unnecessarily blur the distinction between direct causes of action for negligence and derivative claims for indemnification. We are wary of the effects such a decision could have on New Mexico's jurisprudence, including, as this case aptly demonstrates, its effects on the application of statutes of limitation. {29} In a recent case with facts analogous to those before us, a federal district court judge applied Virginia law and dismissed an equitable indemnity action for failure to state a claim because the complaint had not alleged that the defendant had caused any harm to the injured party. Canal Ins. Co. v. Lebanon Ins. Agency, Inc., 504 F.Supp.2d 113, 117-18 (W.D.Va.2007). In Canal Insurance, an insurance agent mistakenly submitted an incorrect application for uninsured motorist (UM) coverage to the insurance company, the effect of which was to increase the benefits available under the insured's UM policy from $50,000 to $750,000. Id. at 116. Before the agent could correct the mistake, an employee of the insured was injured in a motor vehicle accident and made a claim for UM coverage under the policy. Id. After settling the claim with the employee for $500,000, the insurance company sought indemnity from the insurance agent for the amount of its loss, claiming that the agent was negligent. Id. {30} The district court concluded that [a]n indemnity claim does not seek recovery for any direct harm caused by the defendant to the plaintiffit is clearly distinct from a direct cause of action. Id. at 117. Rather, a properly pled indemnity claim must allege that the defendant caused some direct harm to a third party and that the plaintiff discharged the resulting liability from this harm. Id. (emphasis added). The district court held that (1) the insurance company's injury (paying $500,000 instead of $50,000 to the insured) was caused directly by the agent's alleged negligence, and (2) the insurance agent had not harmed the third-party insured, because (3) the insured's injury was caused by the motor vehicle accident. Id. at 117-18. The district court further noted that [i]t is apparent that [the insurance company] has asserted these indemnity claims at least in part in order to avoid the bar of the statute of limitations that might otherwise be applicable to a direct claim against [the insurance agent]. Id. at 117. Although not expressly a part of the district court's decision, we note that the agent's alleged negligence actually benefitted the insured by providing more coverage than he otherwise would have received under a correctly submitted application. {31} On the facts before us as pled by the Authority, the Authority was injured when it was required to pay Moriarty more benefits than otherwise would have been required under correctly drafted policies. Like the injury to the insurer in Canal Insurance, the Authority's injury was caused directly by Gallagher's alleged negligence. It is also apparent that Moriarty's injury was caused not by Gallagher, but by the criminal acts of its employee when she embezzled funds from the school district. Therefore, because the Authority's injury was directly caused by Gallagher's alleged negligence and because Gallagher did not directly harm Moriarty, an equitable indemnity claim is inappropriate. {32} Finally, we understand that the Authority has alleged that Gallagher's negligence will cause it to continue to face potential liability, perhaps indefinitely, for crime losses that may yet be discovered. In other words, Gallagher's alleged negligence in drafting the London policies may further expose the Authority to future, as yet undiscovered liability for crime losses that occurred during the period in which the London policies were in effect. We understand the Authority's concern to be that a denial of its claim for indemnity may preclude it from relitigating issues relating to Gallagher's alleged negligence with respect to undiscovered future injuries on the basis of res judicata and collateral estoppel. To the extent the Authority is arguing that its claim for indemnity should be allowed in order to avoid a potential inequity that may result from the application of issue or claim preclusion, this issue is not yet ripe for determination, and we need not address such a speculative concern at this time. {33} For the reasons stated above, we hold that the district court was correct in dismissing the Authority's claim for indemnification on theories of negligence, breach of contract, implied warranty, and derivative liability because its claim was, in fact, one for professional negligence.