Opinion ID: 891620
Heading Depth: 1
Heading Rank: 9

Heading: The contract to defend and indemnify Guest is an insurance contract.

Text: {59} In her final point of appeal, Guest argues that the Court of Appeals erred in holding that her defense and indemnification agreement with Allstate is not an insurance contract. She asks this Court to hold as a matter of law that the agreement meets the statutory definition of insurance and to remand the case so that she can present argument and evidence that she is entitled to attorney fees under statute or the common law. See NMSA 1978, § 39-2-1 (1977) (In any action where an insured prevails against an insurer who has not paid a claim on any type of first party coverage, the insured person may be awarded reasonable attorney's fees and costs of the action upon a finding by the court that the insurer acted unreasonably in failing to pay the claim.); § 59A-16-30(B) (1990) (allowing the trial court to award attorneys fees for a willful violation of the Unfair Insurance Practices Act); see also Lieber v. ITT Hartford Ins. Ctr., Inc., 15 P.3d 1030, 1037 (Utah 2000) (stating that under Utah common law, [a]ttorney fees may be awarded where a breach of the implied covenant of good faith and fair dealing, inherent in every insurance contract, has occurred). {60} Guest asserts that the contract in this case fits New Mexico's statutory definition of insurance. See NMSA 1978, § 59A-1-5 (1984) (`Insurance' is a contract whereby one undertakes to pay or indemnify another as to loss from certain specified contingencies or perils, or to pay or grant a specified amount or determinable benefit in connection with ascertainable risk contingencies, or to act as surety.). She maintains that the Court of Appeals wrongly held that the contract in this case is not an insurance contract by grafting several requirements onto the definition of insurance that were not included by the Legislature. See Guest, 2009-NMCA-037, ¶¶ 61-63, 145 N.M. 797, 205 P.3d 844 (holding that the contract is not an insurance contract because it does not involve risk distribution or unequal bargaining power). We agree that the Court of Appeals strayed too far from the statutory definition in its analysis. {61} We first note that the prior definition of insurance, dating back to 1925, see 1925 N.M. Laws, ch. 135, § 1, was somewhat circular and formalistic, see NMSA 1978, § 59-1-1 (1925, as amended through 1984) (defining insurance as any form of insurance, bond or indemnity contract, the issuance of which is legal in the state of New Mexico). If the current statute continued to define insurance, more or less, as insurance, we might agree with the Court of Appeals' analysis, which looked to the common law for those features historically used to determine whether a particular contract is a contract of insurance. See Guest, 2009-NMCA-037, ¶¶ 60-63, 145 N.M. 797, 205 P.3d 844. {62} But the current definition, adopted by the Legislature as part of the Insurance Code in 1984, articulates a functional approach, looking to the substance of the contract rather than to its label. See § 59A-1-5. The Legislature directed and focused our inquiry by specifying the controlling aspects of a contract that make it one of insurance. This definition makes no mention of risk distribution, risk sharing, or unequal bargaining power, the traditional features of insurance on which the Court of Appeals relied to determine that the contract in this case was not an insurance contract. See Guest, 2009-NMCA-037, ¶¶ 60-63, 145 N.M. 797, 205 P.3d 844. Rather, for this contract to be one of insurance, the definition simply requires that Allstate agreed to indemnify [Guest] as to loss from certain specified contingencies or perils. Section 59A-1-5. That is precisely what Allstate agreed to doto pay a judgment if the Durhams prevailed in their claims against Guest. {63} Allstate argues, however, that the statutory definition of insurance, if applied literally, would encompass an array of contracts which are not ordinarily considered to be insurance according to the commonly understood meaning of the term. See 1 Eric Mills Holmes & Mark S. Rhodes, Appleman on Insurance, 2d § 1.3, at 16 (1996) (In most states where `insurance' (or the term `contract of insurance') is defined by statute, the definitions are usually brief, cryptic and unsatisfactory. .... Such overbroad definitions are not useful and may cause many commercial relationships erroneously to constitute insurance.). We agree with Allstate in principle. To characterize as insurance every contract that contains an indemnity agreement of some sort would bring a multitude of everyday commercial contracts under the purview of the Insurance Code, NMSA 1978, §§ 59A-1-1 to 59A-59-4 (1984, as amended), and obligate the parties to comply with a host of statutory requirements and regulations. See, e.g., § 59A-5-10 (requiring any person who transact[s] insurance to obtain a certificate of authority from the superintendent of insurance). We agree that the Legislature did not intend such an overly broad result. Consequently, we will look beyond the plain language of the statute to clarify its intended scope. {64} As evidenced by our insurance statute, the concept of indemnity is central to any definition, but a promise to indemnify, by itself, is not enough. See 1 Steven Plitt et al., Couch on Insurance 3d § 1:7, at 1-19 (rev. ed. 2009) (While a policy of insurance ... is essentially a contract of indemnity, not all contracts of indemnity are insurance contracts; rather, an insurance contract is merely one type of indemnity contract.). For example, we recently considered an indemnity provision buried in the fine print of an equipment rental contract to determine whether the promise of indemnity was void as against public policy. See United Rentals Nw., Inc. v. Yearout Mech., Inc., 2010-NMSC-030, ¶¶ 1, 8, 148 N.M. 426, 237 P.3d 728 (holding that an equipment rental contract is a construction contract such that the indemnity provision was unenforceable). Experience teaches that this kind of indemnity clause is common in the commercial setting and is often a boiler-plate feature of a contract of adhesion. Not even Guest argues that such a provision, clearly incidental to the primary aim of the contract, should subject the parties to the rigors of the Insurance Code. See Castleberry v. Goldome Credit Corp., 418 F.3d 1267, 1273 (11th Cir.2005) (When assumption of risk is only collateral to a contract that has a principal purpose other than risk shifting, the contract is not a contract of insurance.). {65} Our own caselaw provides an appropriate limiting principle to what would otherwise be an overly inclusive definition of insurance. In New Mexico Life Insurance Guaranty Ass'n v. Moore, 93 N.M. 47, 48, 596 P.2d 260, 261 (1979), this Court was asked to determine if a group of health maintenance organizations (HMOs) were engaged in `health insurance' so as to subject them to New Mexico's Life Insurance Guaranty Act. Moore held that the HMOs were not insurers under the Guaranty Act because their `principal object and purpose' was to provide member-paid servicesnot to provide indemnity. 93 N.M. at 50-51, 596 P.2d at 263-64. {66} The principal object and purpose test was first announced in Jordan v. Group Health Ass'n, 107 F.2d 239 (D.C.Cir.1939), and as in Moore the test was used to determine whether a group health plan was insurance or a service contract. The test directs a court to consider not ... whether risk is involved or assumed, but ... whether that or something else to which it is related in the particular plan is its principal object and purpose. ' Id. at 248 (emphasis added). This approach has been followed in several other jurisdictions to determine whether particular contracts constitute insurance. See, e.g., Truta v. Avis Rent A Car Sys., Inc., 193 Cal.App.3d 802, 238 Cal.Rptr. 806, 812-13 (1987) (holding that the collision damage waiver provision in an automobile rental contract did not constitute insurance because the principal object and purpose of the contract was automobile rental), superseded by statute as stated in Schnall v. Hertz Corp., 78 Cal. App.4th 1144, 93 Cal.Rptr.2d 439 (2000); Kinkaid v. John Morrell & Co., 321 F.Supp.2d 1090, 1100 (N.D.Iowa 2004) (holding that a provision in a contract for the sale of hogs deducting a small percentage of the sale price in exchange for the assumption of the risk of the death of the hogs after their purchase was not insurance because the provision was incidental to the primary object and purpose of the contract); Allen v. Burnet Realty, LLC, 784 N.W.2d 84, 89 (Minn. Ct.App.2010) (holding that an indemnification plan offered by a realty company to its associates was not insurance because it was merely part of a contract that had the principal object and purpose of selling real estate). {67} As one treatise explains the application of the test, [i]n the final analysis, many analysts will ... ask one question: What is the principal object of the contract? Is it indemnity, or is it something else? If the principal object of the contract is indemnity, the contract constitutes `insurance' and is therefore within the scope of state regulation. Robert H. Jerry, II, 1 New Appleman on Insurance Law Library Edition § 1.03[3][b], at 1-27 to -28 (Jeffery E. Thomas & Francis J. Mootz, III eds., 2009). We find this analysis persuasiveespecially given the emphasis on indemnity in our statutory definition of insurance. {68} We are persuaded that this contract between Allstate and Guest is the type that the Legislature intended to characterize as insurance, even though, as Allstate points out, it lacks an insurance contract's formal characteristic of adhesion and its components of paid premiums, a formal policy, and issued claims. When Allstate agreed to defend and indemnify Guest, it clearly assumed the risk of her losses resulting from the Durham lawsuit. More importantly, the promise to defend and indemnify her was not a collateral agreement intended to induce Guest to enter into a larger contract with Allstate. Guest's defense and indemnification was the exclusive purpose of the contract. This contract meets our statutory definition of insurance because its principal object and purpose is to indemnify Guest in the event of an adverse judgment in the Durham litigation. {69} Under these circumstanceswhere the only purpose of this agreement was to shift Guest's risk to Allstate in the event she became liable to the Durhamswe believe that the Legislature intended its definition of insurance to apply literally. When an entity such as Allstateno stranger to the requirements of the Insurance Codeenters into an agreement with the sole purpose of assuming the risk of another party, it is providing insurance. {70} We do not decide whether Guest is actually entitled to attorney fees because that issue is not properly before us. We only hold that the contract in this case is an insurance contract, and we remand to the trial court to consider whether Guest's legal theories for the recovery of her fees have merit and to consider the evidence accordingly. {71} As a final matter, Allstate does not challenge and we do not disturb the jury's finding that Guest is entitled to punitive damages. The sole remaining issues for the trial court on remand are whether Guest should recover her legal fees and whether Guest's punitive damages award is constitutionally reasonable given the reduction of her compensatory damages in this appeal. We consider all other issues raised on appeal to be resolved by this Opinion.