Nellis v. Farmers Ins. Co. of Ariz.

I attest to the accuracy and
integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'05- 14:09:10 2012.03.05

Certiorari Denied, November 23, 2011, No. 33,271

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number: 2012-NMCA-020

Filing Date: September 20, 2011

Docket No. 29,295

LYDIA and PATRICK NELLIS, for themselves
and all others similarly situated,

Plaintiffs-Appellees,

v.

FARMERS INSURANCE COMPANY OF ARIZONA,

Defendant-Appellant.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Linda M. Vanzi, District Judge

Myers, Oliver & Price, P.C.
Floyd D. Wilson
Albuquerque, NM

Freedman, Boyd, Hollander,
Goldberg, Ives & Duncan, P.A.
David Freedman
Joseph Goldberg
Albuquerque, NM

Eaves & Mendenhall, P.A.
John M. Eaves
Karen Mendenhall
Albuquerque, NM

Law Office of Alan Konrad
Alan Konrad
Albuquerque, NM

Peifer, Hanson & Mullins, P.A.

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Charles R. Peifer
Robert E. Hanson
Albuquerque, NM

Dennis M. McCary
Albuquerque, NM

for Appellees

Rodey, Dickason, Sloan, Akin & Robb, P.A.
Andrew G. Schultz
Albuquerque, NM

Gibson, Dunn & Crutcher LLP
Theodore J. Boutrous, Jr.
Christopher Chorba
Los Angeles, CA

Skadden, Arps, Slate, Meagher & Flom LLP
Douglas B. Adler
Darrel J. Hieber
Los Angeles, CA

Raoul D. Kennedy
San Francisco, CA

for Appellant

OPINION

BUSTAMANTE, Judge.

{1} We are presented with yet another factual and legal “twist” in a series of class action
cases challenging the manner in which insurance companies document and collect charges
imposed when insureds opt to pay their premiums in installments rather than in a lump sum.
After certifying the case as a class action, the district court entered summary judgment in
favor of the Class on the merits of its breach of contract claim. Farmers Insurance Company
of Arizona (Farmers) asked the district court to reconsider its decision, relying on
Nakashima v. State Farm Mutual Auto. Ins. Co., 2007-NMCA-027, 141 N.M. 239, 153 P.3d
664, an opinion issued by this Court after the district court entered its summary judgment
in this case. The district court denied Farmers’ motion. Concluding that Nakashima
controls, we reverse.

I. THE FACTUAL SETTING

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{2} The factual underpinnings of the case are deceptively simple. Farmers provides
automobile insurance coverage to its customers. The parties agree that Farmers’ standard
practice is to offer policies with a six-month term and to require payment of the premium in
a lump sum for the entire term. Customers who prefer—for whatever reason—to pay in
smaller increments must make arrangements to pay their premium through Prematic Service
Corporation (Prematic). It is “not possible for a Farmers’ insured to pay” premiums on a
monthly basis without going through Prematic. The parties also agree that insureds who
choose to pay through Prematic must pay a monthly service charge or fee. The issues in the
case revolve around the nature of this service charge or fee—whether it is itself a
premium—and whether imposing the fee, whatever its nature, is allowable under the terms
of the insurance policy Farmers issues.

{3} The Class is composed of persons who chose to pay their premiums on a monthly
basis during the class period, which commenced in April 1997. The mechanics of how
insureds enter into a Prematic agreement have changed over the years. The most dramatic
change occurred in February 2001. Prior to that date insureds signed a written payment plan
agreement with Prematic. Signature of the written agreement and payment of two months
of premiums led to assignment of a Prematic account number which was in turn noted on the
Declarations sheet of the insured’s policy.

{4} Starting in February 2001, a written agreement was no longer required and thereafter
rarely used. Instead, insureds were enrolled “in the Prematic monthly premium payment
plan program by entering the insured’s information utilizing the Farmers policy processing
computer system.” In both scenarios, the entire process was handled by Farmers agents.
Once the insured’s information was entered into the computer, the system assigned a
Prematic account number which, as before, appeared on the insured’s Declarations sheet
labeled as such. But the first time the insured would see a Prematic Monthly Plan
Agreement under the new procedure was with the first monthly bill. The monthly bills
reflected the service charge as an amount separate from, and in addition to, the policy
premium. The policy premium reflected on the initial bills was an amount equal to one-sixth
of the six-month premium shown on the Declarations sheet. The Declarations sheet only
included the six-month premium and a reference to “Prematic” next to the spot where
“Total” premium would otherwise appear. The spot next to the line for “Fees” was blank.
A representative example of the Declarations sheet is attached to this opinion.

{5} Whether the Prematic arrangement was embodied in a written document or simply
noted in a computer program, the parties agree that the agreement was—in fact, had to
be—in place before a Farmers agent would issue a policy of insurance.

{6} Once an insured made arrangements to pay monthly, Farmers issued a policy that
included endorsement E0022, somewhat oddly titled the “Monthly Payment Agreement,”
a copy of which is attached to this Opinion. On its face, endorsement E0022 purports to
amend the policy period to “one [c]alendar month”continuing for “successive monthly

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periods if the premium is paid when due.” Monthly premiums are subject to future
adjustment to match the “then current rate on the semi-annual or annual anniversary of the
policy.” Endorsement E0022 also includes an integration clause: “This endorsement is part
of your policy. It supersedes and controls anything to the contrary. It is otherwise subject
to all other terms of the policy.” The parties spend much time and effort disputing the
meaning and effect of this language.

II. THE PROCEDURAL POSTURE

A. The Complaint

{7} The “Class Action Complaint for Breach of Contract” was filed in April 2003. The
complaint alleged that Farmers’ insureds who “buy insurance on a monthly basis must pay
service charges” to Prematic as agent for Farmers. The complaint also alleged that the
service charges “are designed to cover the additional administrative expense generated” by
buying insurance on a monthly basis. As such, the “service charges are a portion of the total
cost of the insurance purchased” by Class members. There is no assertion in the complaint
that Class members were not informed about the service charges before or at the time they
agreed to buy insurance coverage from Farmers.

{8} The complaint asserted that imposition of the service charges is a breach of contract
because the “[p]olicies do not specify any service charge to be paid by a policyholder who
buys insurance on a monthly basis.” The only mention of “fees” in the policy is on the
Declarations sheet and, according to the complaint, it provides “that there are no ‘Fees’
payable with respect to the Policies.” Thus, the Class members “have been charged premium
(i.e., service charges) in addition to the premium specified in the Policies.”

{9} In addition, the complaint asserts that the service charges constituted premium under
New Mexico and Arizona statutory provisions which require that “premiums” be specified
in the policy itself. See NMSA 1978, § 59A-18-3 (1984) (defining premium as “the
consideration for insurance . . . by whatever name called”); NMSA 1978, § 59A-16-24(B)
(1984) (“No person shall wil[l]fully collect as premium, administration fee or other charge
for insurance or coverage any sum in excess of the premium or charge applicable thereto as
specified in the policy[.]”); Ariz. Rev. Stat. Ann. § 20-1113(B)(6) (1954) (requiring that
“[e]very policy shall specify . . . [t]he premium.”). The complaint alleged that Farmers
breached these statutory provisions when it imposed the service charges without including
them in its policies and that “Farmers’ violation of this statutory requirement is a breach of
contract.”

B. The Cross-Motions for Summary Judgment

{10} After the district court certified the Class, the parties filed cross-motions for summary
judgment, firm in their mutual conviction that Farmers’ policy forms were not ambiguous
and that there were no material issues of fact preventing a summary decision. The Class’s

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argument in support of summary judgment was essentially an expanded version of its
complaint: that is, the service charges of necessity constitute premiums; they are not detailed
in the policy itself; all premiums must appear on the policy itself; ergo, to impose them is
a breach of the contract represented by the policy.

{11} The Class articulated three points in support of its position that the service charges
constituted premiums. First, the Class refined its argument that the service charge was
designed to pay for the “additional administrative and overhead expenses associated with
monthly billing,” thereby increasing the cost of insurance. It argued that this fact did not
convert the charges into “installment fees” because Farmers’ insureds were not buying six
months of insurance at a time and then paying for it in six installment payments. Rather,
under the terms of endorsement E0022, insureds were buying insurance in monthly
increments. This feature, the Class argued, distinguished the facts here from the situation
in cases like Blanchard v. Allstate Insurance Co., 99-2460, pp. 6-7 (La. App. 1 Cir.
10/18/00); 774 So. 2d 1002, 1005-06, which held that Allstate’s installment fees were not
premium, in part because they were paid “for the privilege of paying the premium[s] over
time.”

{12} Second, the Class argued that, as a matter of contract law, there could be no
consideration supporting imposition of the service charges, given that the policy allowed—or
required—a month’s premium for a month’s worth of coverage. And, in any event, the Class
argued, the parol evidence rule precluded proof of any agreements—including the Prematic
agreement—which may have been entered into before the policies were issued.

{13} Third, the Class argued that Farmers could not escape liability simply because the
service charges were paid to Prematic. The Class’s position was that Prematic and Farmers
were so inextricably linked through corporate ties and function—what could be more
essential to the insurance business than efficient collection of premiums?—that they should
be dealt with as one and the same entity. Or, the Class argued, at the very least, Prematic
was Farmers’ agent because policies could be cancelled for non-payment of service charges
and because Prematic sent out notices of cancellation to Farmers’ insureds. See NMSA
1978, § 59A-18-29(A) (1984) (“The insurer or agent shall give the named insured written
notice of such cancellation[.]”)

{14} Farmers argued in contrast that: (1) the service charges were not premium, either
under the provisions of the policy itself or under New Mexico’s statutory definition, and thus
could not be considered consideration for insurance coverage, and (2) the Prematic
invoices—which are referred to on the Declarations sheet—“are incorporated by reference
into the policy documents and clearly and separately set forth the service fees which
Plaintiffs claim were not set forth in the policy documents.” Farmers used the reference to
“Prematic” on the Declarations sheet to negate the potential effect of its policy’s integration
clause: “To construe the documents to exclude the Prematic invoices would be unreasonably
inconsistent with the language in the policy documents. Construed together, as they must
be, the policy documents set forth service fees due and payable.”

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{15} Interestingly, while Farmers asserted that Prematic was an entity “separate and apart
from Farmers,” it did not argue that this fact was of any particular consequence or material
to the issues presented by the motions for summary judgment.

C. The Trial Court’s Decision

{16} Analyzing the case as framed by the parties—including the notion that the policy is
not ambiguous—the district court found in favor of the Class. The district court correctly
identified “[t]he primary areas of disagreement between the parties [to be] whether service
fees are incorporated into the contract and whether they are considered ‘premium.’” The
district court first concluded that “the payment plan that imposes a service charge is not part
of the insurance contract.” The district court rejected Farmers’ argument that the monthly
invoices from Prematic, which did reflect the service charges, were or could be incorporated
into the policy given that the invoices were not attached to the policy when delivered.
Rather, the invoices were mailed some ten days after a policy is issued.

{17} The district court noted that the space next to the word “Fees” on the Declarations
sheet is blank and concluded that this blank space “means there are no fees associated with
this policy.” The district court rejected Farmers’ argument that the “Fee” line and the
references to “Prematic” on the Declarations sheet serve “in the monthly payment context
to remind the customer that he/she has chosen the monthly billing method and to refer to
those documents for the ‘Total’ amounts payable.” The district court emphasized that the
policy itself did not contain any indication that the “total premium amount is a function of
the number of payments made.”

{18} The district court also concluded that the service charges constitute premiums and
that Farmers’ collection of them was a violation of Section 59A-16-24(B). The district court
rested its decision on three grounds, each in response to Farmers’ argument. First, the
charges could not be installment fees because the policy as issued was for only one month,
with no obligation to pay past each month. Thus, there was of necessity no continuing
obligation to support the notion of installment payments. Second, the district court held that
Farmers could cancel a policy for failure to pay service charges. As a result, “it would
appear that the service charge is consideration for the insurance contract.” Last, as in Smoot
v. Physicians Life Ins. Co., 2004-NMCA-027, ¶ 12, 135 N.M. 265, 87 P.3d 545, the service
charges had the effect of increasing the cost of purchasing insurance and, as such, constituted
premiums.

D. The Motion for Reconsideration

{19} Farmers asked the district court to reconsider its ruling after this Court decided
Nakashima. Farmers altered its argument considerably to match the Nakashima approach
to the issues, emphasizing for the first time the significance of the Prematic agreement.
Farmers noted that all of its insureds desiring to pay on a monthly basis had to enter into a
Prematic agreement, including payment of an associated service charge, before a policy

6
would be issued and argued that the Prematic agreement was a contract separate from the
policy. Farmers recognized it had changed its argument, noting that “[i]t is not surprising
that the Prematic [a]greement was not the focus of the earlier cross-motions for summary
judgment given that Nakashima established the pivotal significance of that separate
agreement.”

{20} The district court denied the motion to reconsider without a hearing, distinguishing
Nakashima on its facts and reading it to be limited to the language of the policy at issue in
that case. The letter ruling did not discuss the Prematic agreement.

III. ANALYSIS

A. Standard of Review

{21} All of the issues raised by this appeal are subject to de novo review. Self v. United
Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582 (“Summary judgment
is appropriate where there are no genuine issues of material fact and the movant is entitled
to judgment as a matter of law. . . . We review these legal questions de novo.” (citation
omitted)). If no material facts are in dispute, we “are not required to view the appeal in the
light most favorable to the party opposing summary judgment.” City of Albuquerque v.
BPLW Architects & Eng’rs, Inc., 2009-NMCA-081, ¶ 7, 146 N.M. 717, 213 P.3d 1146. This
approach seems particularly appropriate where, as here, the parties file cross-motions for
summary judgment. In addition, as in Nakashima, we are called on to construe an insurance
policy as well as statutory provisions. Both issues are questions of law that we review de
novo. Richardson v. Farmers Ins. Co., 112 N.M. 73, 74, 811 P.2d 571, 572 (1991) (“The
question of whether an ambiguity exists [in an insurance policy] is a question of law to be
decided by the court.”); Smith & Marrs, Inc. v. Osborn, 2008-NMCA-043, ¶ 10, 143 N.M.
684, 180 P.3d 1183 (“We review a district court’s interpretation of an unambiguous contract
de novo.” (internal quotation marks omitted)); Nakashima, 2007-NMCA-027, ¶ 5; Morgan
Keegan Mortg. Co. v. Candelaria, 1998-NMCA-008, ¶ 5, 124 N.M. 405, 951 P.2d 1066
(noting that interpretation of a statute is a question of law which an appellate court reviews
de novo).

{22} We acknowledge one difficulty with the parties’ assertion that there are no questions
of fact preventing resolution of the case on a purely legal basis. On appeal Farmers argues
that summary judgment was improper because Prematic—a separate entity that was not a
party to the policy and is not a party in the case—collected and retained the service fees.
Farmers made this factual assertion below. Nevertheless, the Class argues that the argument
was not properly preserved.

{23} “To preserve an issue for review on appeal, it must appear that appellant fairly
invoked a ruling of the trial court on the same grounds argued in the appellate court.”
Woolwine v. Furrs, Inc., 106 N.M. 492, 496, 745 P.2d 717, 721 (Ct. App. 1987). “Absent
[a] citation to the record or any obvious preservation, we will not consider the issue.”

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Crutchfield v. N.M. Dep’t of Taxation & Revenue, 2005-NMCA-022, ¶ 14, 137 N.M. 26, 106
P.3d 1273. The rules of preservation are no different for review of summary judgment than
for review of other final orders. See Spectron Dev. Lab. v. Am. Hollow Boring Co., 1997-
NMCA-025, ¶¶ 31-32, 123 N.M. 170, 936 P.2d 852. “We review the case litigated below,
not the case that is fleshed out for the first time on appeal.” Id. ¶ 32 (quoting In re T.B.,
1996-NMCA-035, ¶ 13, 121 N.M. 465, 913 P.2d 272 (alteration in original) (internal
quotation marks omitted)).

{24} Farmers disputed the Class’s argument that Prematic is its alter ego or agent and
consistently described the two as distinct entities performing separate functions. But Farmers
never argued that this asserted separateness made breach somehow impossible or even that
the dispute about the nature of the relationship between Farmers and Prematic constituted
a material issue of fact precluding summary judgment. Even in its motion for
reconsideration relying on Nakashima, Farmers did not assert that the nature of its corporate
and legal relationship with Prematic was a matter of consequence. We agree with the Class
that Farmers failed to preserve the argument in the form it is made on appeal. Accordingly,
this Opinion will treat Prematic and Farmers as if their legal relationship is not pertinent or
material, in short, essentially as if they are the same entity.

B. Nakashima’s New Approach

{25} We start our analysis with a review of Nakashima, a case with similar, though not
identical, facts in which we agreed with the district court’s conclusion that the plaintiff there
“expressly agreed to the installment fees by entering into a separate contract with [the
d]efendant to pay her premium in installments and further that the fees associated with
paying in installments are not premium.” 2007-NMCA-027, ¶ 8. We then consider whether
the factual differences between the two cases counsel or require a different result here.
Acknowledging that the differences alter the legal analysis somewhat, we yet conclude that
summary judgment in favor of the Class was improper.

{26} The plaintiff in Nakashima was a long-time insured of State Farm under a series of
six-month policies. Id. ¶ 2. At some point, she asked if she could pay her premium in
installments rather than in a lump sum. Id. ¶ 3. She signed a form supplied by her State
Farm agent that enrolled her in a payment plan which allowed her to pay her premium in
monthly installments. The plan included an installment charge or fee that was imposed each
month. Id.

{27} The parties in Nakashima agreed that the monthly installment fee was disclosed to
the plaintiff and that she was aware of it. Id. ¶ 6. Further, the plaintiff in Nakashima did not
dispute that the installment plan she agreed to was a separate agreement between her and
State Farm. Id. ¶ 9. Despite adequate disclosure and the existence of the separate
agreement, the plaintiff argued that State Farm breached its contract because the installment
fees were actually part of the premium for the policy and, as such, they were required to be
included in the “total premium” number stated on the policy. Id. ¶ 8. This requirement

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flowed, the plaintiff argued, from the terms of the policy itself and from applicable statutory
provisions. Id. ¶¶ 10, 22. Having rejected the plaintiff’s arguments in Nakashima, we now
examine our rationale and how it applies here. We start with our statutory analysis and then
move to the contract issues related to the form and content of the policy.

1. Installment Payment Fees Are Not Premiums Under the Insurance Code.

{28} Mirroring the argument made by the plaintiff in Nakashima, the Class asserts that
Farmers’ collection of the Prematic installment charges is contrary to the Insurance Code.
Specifically, the Class argues that the Code’s definition of “premium” in Section 59A-18-3
covers installment fees. Nakashima squarely rejected this argument stating:

We agree with the district court that [the d]efendant’s installment fees are not
consideration for insurance and that such fees are not charged in connection
with the procurement of insurance. Rather, as discussed previously, the
installment fees are associated with the privilege of paying a premium in
installments and are not for the actual purchase of insurance itself.

2007-NMCA-027, ¶ 23. Nakashima also squarely rejected the argument that installment fees
should be deemed an “administration fee,” which must be specified in the policy under
Section 59A-16-24(B). Nakashima, 2007-NMCA-027, ¶ 33.

{29} There is nothing in the factual circumstances of this case that would render these
holdings inapplicable here. The Class acknowledged in its complaint that the fees reflect and
are intended to cover the increased costs associated with monthly billing and payment. This
acknowledgment by itself is sufficient to bring this case within the rationale and holding of
Nakashima with regard to the statutory basis of the claim. See id. (distinguishing
administration fees that must be stated in a policy from “fees related to the payment option
selected by the policyholders”). As the Class implicitly acknowledges in its briefing, other
aspects of its argument—lack of consideration, interpretation, and parol evidence
issues—are more properly dealt with as part of its common law breach of contract claims.
Whatever the merits of these arguments, they do not affect the basic nature of the fees as
charges flowing from the Class’s decision to pay monthly rather than in a six-month lump
sum.

{30} Nakashima based its decision in part on the rather restrictive concept that insurance
rates are “associated with the transfer of risk.” 2007-NMCA-027, ¶ 20. The Class asks us
to revisit this discussion in Nakashima because it improperly links the concept of premium
to charges “directly relat[ed] to the insurer’s actuarial risk of loss.” We acknowledge that
Nakashima connected premiums to the cost of risk. But the discussion was not intended to
be comprehensive or to indicate that the cost of risk was the sole factor determining the level
of premiums. Obviously, there are other factors at work—including administrative overhead
and profit—which are folded into the final numbers quoted by insurers as premium.
Acknowledgment of that fact does not alter the core concept that installment fees

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generally—and the Prematic service charges in particular—are designed and intended to
“cover the costs associated with a payment plan.” Id.

{31} The Class relies heavily on Troyk v. Farmers Group, Inc., 90 Cal. Rptr. 3d 589 (Ct.
App. 2009) in support of its position that the fees should be deemed premium under the
statute. Troyk involved the same family of companies, including Prematic Service
Corporation, and the same monthly payment plan agreement we examine here. Id. at 598.
Troyk examined whether the service charges constituted “premium” under California’s
statutory scheme, specifically Cal. Ins. Code § 381(f) (2005)—the California counterpart to
Section 59A-18-3—and concluded that the Prematic service charges were premium under
the statute. Troyk, 90 Cal. Rptr. 3d at 604. The court in Troyk decided that the conversion
of the policy from a six-month to a one-month term by endorsement E0022 was decisive.
The court concluded that the service charge tied to monthly payment expenses for a one-
month policy should be included in the overhead charges normally included by insurer to
arrive at a “premium” figure. Id. at 605-07. In so doing, the court in Troyk decided that the
Prematic service charges were not true installment fees. Troyk distinguished Nakashima as
a case involving “true installment payments of premium.” Troyk, 90 Cal. Rptr. 3d at 608.

{32} While we understand the analytical path the court in Troyk followed, we do not
believe it can be squared with Nakashima. The most salient aspect of Nakashima’s approach
is its recognition of a process by which insureds can enter into separate enforceable
agreements for payment of premiums in a mode other than in a lump sum. Unlike
Nakashima, which focused on the process, Troyk focused on the end result of the agreement
for monthly payments. The mechanism used in the policy to achieve and reflect the prior
agreement allowing monthly payments does not transform the Prematic service charges into
something inherent to the policy. As the Class agrees, the service charges are designed to
cover the additional cost of monthly billing and payment. To adopt Troyk’s rationale, we
would have to reverse Nakashima, at least in part. We see no reason to do so.

2. There Is Consideration to Support the Prematic Service Charges

{33} In Nakashima, State Farm and its insured apparently agreed on an insurance
contract—usually for a six-month term—and the associated premium before any installment
arrangements were made. 2007-NMCA-027, ¶¶ 3, 9. The installment fee and the monthly
premium in Nakashima were not stated in the policy but were included in the installment
plan form signed by the insured. Id. ¶ 3. The Declarations page of the policy referenced the
payment plan once the plan was approved. Id. ¶ 11. Though Nakashima does not say
explicitly, we infer that the policy continued to be for a six-month term even after an
installment plan was approved.

{34} Farmers’ Prematic agreement takes a different approach. The parties agree that a
Prematic agreement must be entered into before Farmers will issue a policy that allows
monthly payments. Once the Prematic agreement is in place, Farmers issues a policy which,
pursuant to E0022, is for successive one-month terms. The practical effect of this approach

10
is that Farmers’ insureds pay for the “privilege of purchasing coverage in smaller quantities”
rather than for deferring payment.

{35} The Class, like the plaintiff in Nakashima, argues that the installment fees cannot be
collected because the policy as issued reflects the installment plan and allows monthly
payments and, as a result, there is no consideration to support the Prematic agreement. Id.
¶¶ 11,13. In response to the first argument, Nakashima makes the common sense
observation that “if Plaintiff had not entered into a separate agreement to pay her premium
in installments, such references to a payment plan would not have appeared on her policy.”
Id. ¶ 11. In response to the second argument, we held that the insurer’s agreement to forgo
a lump sum payment and the insured’s gain of the right to pay monthly in exchange for a fee
was adequate consideration. Id. ¶ 13.

{36} We fail to see why our responses in Nakashima are inadequate to meet the Class’s
argument. Endorsement E0022, the mechanism used by Farmers to reflect monthly
payments, would not have been attached to the Class’s policies absent a Prematic agreement
being in place. The Prematic agreement did not result in an increase of the six-month
premium quoted; the premium simply got divided into six payments. The Prematic
agreement did include fees but, given that the gross amount of the premium did not change,
the fees can only reasonably be seen as intended to cover the costs inherent to monthly rather
than lump sum payments.

{37} We conclude that the differences between the installment plan we dealt with in
Nakashima and the Prematic agreement are not material and do not demand a different
result. The plans are structured differently but achieve the same ends for the same
conceptual price.
3. The Parol Evidence Rule Does Not Prevent Enforcement of the Prematic
Agreement

{38} The applicability of the parol evidence rule is the one area in which the factual
differences between Nakashima and this case require a markedly different analysis. The
plaintiff in Nakashima asserted that the integration (or merger) clause of her policy
prevented enforcement of any other agreements. Id. ¶ 12. We rejected the argument, noting
that integration clauses only cover “antecedent and contemporaneous agreements” and do
“not foreclose the possibility of future agreements.” Id. Because in Nakashima the
installment plan was entered into after the policy was agreed to, the parol evidence rule
simply did not apply. Id.

{39} The facts here are reversed: the Prematic agreement must be entered into first and
then the policy is issued. Even though the two events—entry into the Prematic agreement
and issuance of the policy—occur almost simultaneously, the sequence may be conceptually
significant under the parol evidence rule. As a result, Nakashima’s solution and rationale
does not apply here and we must engage in a different analysis.

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{40} Contract law is the law of exchange; it provides the set of rules that govern how and
the extent to which agreements between parties are honored and enforced. The law of
contract asks and answers the following questions: (1) Have the parties through their
behavior created legally recognizable expectations in one another? (2) If so, how should
those expectations be characterized and understood? (3) Have the understandings between
the parties been faithfully carried out? (4) If not, what should the law do about it? The
parol evidence rule touches on the first and second questions by providing substantive limits
on the evidence parties are allowed to submit to prove the extent of the enforceable
agreement they have reached. As such, it is advisable to be as precise as possible when
stating and applying the concept. Application of the rule has proven—to put it
mildly—difficult. “Few subjects connected with the interpretation of contracts present so
simple and uniform a statement of principle, bedeviled by such a perplexing and harassing
number of difficulties in its application, as the parol evidence rule.” 4 Samuel Williston, A
Treatise on the Law of Contracts § 632A, at 984 (3d ed. 1961).

{41} We begin with two definitions that express the rule from different perspectives but
to the same end. The Restatement (Second) of Contracts § 213 (4th ed. 2008), expresses the
concept in terms of “discharge”:

(1) A binding integrated agreement discharges prior agreements to the
extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior
agreements to the extent that they are within its scope.

{42} Corbin defines the rule in terms of the agreement and expectations of the parties.
“When two parties have made a contract and have expressed it in a writing to which they
have both assented as the complete and accurate integration of that contract, evidence,
whether parol or otherwise, of antecedent understandings and negotiations will not be
admitted for the purpose of varying or contradicting the writing.” 6 Arthur Linton Corbin,
Corbin on Contracts § 573, at 72 (interim ed. 1960). As Corbin notes, this is the essence of
the so-called “parol evidence rule.” Corbin, supra § 579 at 120 (internal quotation marks
omitted).

{43} However expressed, the purpose of the rule is to prevent proof of understandings and
agreements that the parties did not intend to survive. Application of the rule for any other
purpose is not utile or proper.

{44} An agreement can be completely or partially integrated. Section 210 of the
Restatement states:

(1) A completely integrated agreement is an integrated agreement
adopted by the parties as a complete and exclusive statement of the terms of
the agreement.

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 (2) A partially integrated agreement is an integrated agreement
other than a completely integrated agreement.

(3) Whether an agreement is completely or partially integrated is
to be determined by the court as a question preliminary to determination of
a question of interpretation or to application of the parol evidence rule.

Restatement (Second) of Contracts § 210 (4th ed. 2008). Where there are no issues of fact
concerning the wording of a document or the circumstances under which it was agreed to by
the parties, courts will decide whether the document or documents are integrated and the
level of integration as a matter of law. See Denny’s Rests., Inc. v. Sec. Union Title Ins. Co.,
859 P.2d 619, 624 (Wash. Ct. App. 1993); cf. also Mark V, Inc. v. Mellekas, 114 N.M. 778,
781, 845 P.2d 1232, 1235 (1993) (allowing the meaning of contract terms to be decided as
a matter of law when the facts are not in dispute). In accord with the following discussion,
we hold that the Farmers’ policy is partially integrated and, as such, does not preclude proof
and enforcement of the Prematic agreement.

{45} As a factual matter, the Class relies on the merger clauses in the policy and
endorsement E0022 to argue that the policy is fully integrated. The policy states, “This
policy with the Declarations includes all agreements between you and us relating to this
insurance. No other change or waiver may be made in this policy except by endorsement,
new Declarations[,] or new policy issued by us.” Endorsement E0022 states “This
endorsement is part of your policy. It supersedes and controls anything to the contrary. It
is otherwise subject to all other terms of the policy.”

{46} The Class also points out that the line next to the word “Fees” on the Declarations
sheet is blank and argues that this means there are no fees imposed under the policy. We
note that the Class does not acknowledge the two references to “Prematic” on the
Declarations sheet and does not try to explain what they might mean. Rather, the Class
asserts that the plain meaning of the policy forecloses any need for further interpretation.

{47} As a legal matter, the Class seems to argue that insurance policies should be treated
as completely integrated contracts as a matter of law. The Class quotes from W. Farm
Bureau Mutual Ins. Co. v. Barela, 79 N.M. 149, 151, 441 P.2d 47, 49 (1968) that “[a]
contract of insurance which has been embodied in a formal written instrument, termed a
‘policy,’ merges all prior or contemporaneous parol agreements touching the transaction.”
Western Farm restates the parol evidence rule, but it does not address what kind of evidence
may be admissible to determine whether a particular contract is integrated or the extent and
subject matter of the integration. The Class also seemingly seeks to exclude the most basic
facts surrounding the issuance of the policies. In its Answer Brief, the Class acknowledges
Farmers’ argument that it would not have issued “month-to-month” policies to the Class
without a Prematic agreement. Citing Am. Inst. of Mktg. Sys., Inc. v. Keith, 82 N.M. 699,
702, 487 P.2d 127, 130 (1971) for the proposition that extrinsic evidence concerning or
related to the subject of a contract is inadmissible, the Class asserts “Even if Farmers’

13
position were factually correct, it would not help Farmers insofar as the parol evidence rule
is concerned.”

{48} The gist of the Class’s argument is that the parol evidence rule requires exclusion of
extrinsic evidence on the issue and that the question of integration can and should be
resolved in a vacuum, reviewing the document in isolation. The Class’s approach is contrary
to New Mexico law, the Restatement, and other authority concerning interpretation of
contracts.

{49} As a general matter, our courts have long recognized the value of extrinsic evidence
to aid in the interpretation of contracts. New Mexico abandoned the strict plain meaning,
“four-corners” approach to contract interpretation in C.R. Anthony Co. v. Loretto Mall
Partners, 112 N.M. 504, 508, 817 P.2d 238, 242 (1991) and Mark V, Inc., 114 N.M. at 781,
845 P.2d at 1235. Even before the advent of C.R. Anthony and Mark V, however, our
Supreme Court held that the parol evidence rule did not preclude the introduction of extrinsic
evidence designed to “determine the circumstances under which the parties contracted and
the purpose of the contract.” Levenson v. Mobley, 106 N.M. 399, 403, 744 P.2d 174, 178
(1987); see Wilburn v. Stewart, 110 N.M. 268, 270, 794 P.2d 1197, 1199 (1990) (holding
that parol evidence offered for the purpose of showing misrepresentation that conflicts with
the terms of the contract is admissible in appropriate circumstances); Empire W. Cos. v.
Albuquerque Testing Labs., Inc., 110 N.M. 790, 794, 800 P.2d 725, 729 (1990) (holding that
extrinsic evidence consisting of an earlier, rejected proposal was admissible as evidence of
the purpose and scope of the contract actually entered into). These cases reflect agreement
with Corbin’s assertion that the “terms of any contract must be given a meaning by
interpretation before it can be determined whether an attempt is being made to vary or
contradict them.” 5 Arthur Linton Corbin, Corbin on Contracts § 24.10, at 82 (rev. ed.
1998).

{50} The Class’s reliance on Keith is thus misplaced. Under the approach utilized in
Levenson, Wilburn, and Empire West, Keith would be decided differently; that is, the
extrinsic evidence would have been admissible to help determine the level and scope of
integration of the contract.

{51} The Restatement also recognizes that extrinsic evidence can be used to assess
whether a writing has been adopted as an integrated agreement. Section 214 of the
Restatement provides in pertinent part:

Agreements and negotiations prior to or contemporaneous with the adoption
of a writing are admissible in evidence to establish

(a) that the writing is or is not an integrated agreement;

(b) that the integrated agreement, if any, is completely or partially
integrated;

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 (c) the meaning of the writing, whether or not integrated[.]

Comment a. to the section observes that “[t]he preliminary determination is made in
accordance with all relevant evidence, including the circumstances in which the writing was
made or adopted. It may require preliminary interpretation of the writing.” Thus, under the
Restatement—and our case law—the full panoply of evidence concerning the Prematic
agreement, the issuance of the policy with endorsement E0022, as well as all the features of
the Declarations sheet and the rest of the policy is available to resolve the issue of the level
and scope of integration of the policy.

{52} Considering the totality of the circumstances, we conclude that the policy is only
partially integrated; to do otherwise would be to thwart the intent of the parties. Fortunately
for our analysis, the factual circumstances are not subject to dispute; we are not required to
assess the credibility of the extrinsic evidence describing what happened before and after the
policies were issued. The Class members requested the option to pay monthly. Farmers
agreed to allow monthly payments if the Class members entered into a Prematic agreement.
The Class members did so, and Farmers issued its policy. The policy included endorsement
E0022 providing for a rolling one-month term. The policy also reflected the Prematic
agreement twice on the Declarations sheet. In this context, it is not reasonable to conclude
that either Farmers or the Class intended to preclude recognition and enforcement of the
Prematic agreement.

{53} Rather, it is more plausible that the parties intended the merger clauses to
accommodate the Prematic agreement either: (1) as a separate agreement dealing with the
payment of premium and accompanying monthly service charges—a view that would square
with Nakashima’s treatment of installment plans in similar circumstances; or (2) as a
separate agreement that is actually part of a larger comprehensive arrangement between the
parties that should be construed together. See Harp v. Gourley, 68 N.M. 162, 170, 359 P.2d
942, 947 (1961); Master Builders, Inc. v. Cabbell, 95 N.M. 371, 373-74, 622 P.2d 276, 278-
79 (Ct App. 1980). We need not decide here which approach is analytically preferable
because either will suffice.

CONCLUSION

{54} For the reasons stated above, we reverse the summary judgment entered by the
district court and remand for dismissal of the case.

{55} IT IS SO ORDERED.

____________________________________
MICHAEL D. BUSTAMANTE, Judge

WE CONCUR:

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____________________________________
JAMES J. WECHSLER, Judge

____________________________________
CYNTHIA A. FRY, Judge

Topic Index for Nellis v. Farmers Insurance, No. 29,295

AE APPEAL AND ERROR
AE-SR Standard of Review

CP CIVIL PROCEDURE
CP-CA Class Actions
CP-SJ Summary Judgment

CN CONTRACTS
CN-BR Breach
CN-CS Consideration

EV EVIDENCE
EV-PE Parol Evidence

IN INSURANCE
IN-RA Rates

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