New Mexico Federal Court Holds Actual Notice Triggers Duty To Defend Under Claims-Made-And-Reported Policy

The United States District Court for the District of New Mexico, applying New Mexico law, has held that an insurer’s duty to defend and investigate may be triggered by actual notice of a potential claim rather than strict compliance with a policy’s notice requirements, even under a claims-made-and-reported policy. Kinsale Ins. Co. v. Pecos Valley Prod., Inc., 2026 WL 2018585 (D.N.M. July 13, 2026). The court also held that disputes concerning the duty to defend must be resolved via judicial determination before a refusal to defend; otherwise, an insurer risks waiver of its right to seek determination of coverage or the applicability of any coverage defenses, including as to lack of notice.

A family-owned cannabis business purchased two claims-made-and-reported management liability policies for the 2024-2025 and 2025-2026 policy years. During the renewal process near the end of the first policy period, the insured reported a potential employment-related claim involving the termination of an employee. The insurer renewed the policy with an exclusion for claims relating to that employee. The insurer allegedly did not investigate the potential claim, including whether a defense was owed to the insured under the 2024-2025 policy. Two months into the 2025-2026 policy period, the insured formally notified the insurer of the claim. The insurer denied the claim under both policies and filed a declaratory judgment action seeking a ruling that it had no duty to defend or indemnify. The insured counterclaimed, asserting that the insurer breached its duty to defend by failing to investigate whether a defense was owed once it had actual notice of the potential claim. The insurer filed a motion to dismiss the counterclaim.

In denying the insurer’s motion to dismiss, the court held that, under New Mexico law, actual notice from any source may trigger the duty to defend, even under a claims-made policy. The court declined to limit the actual notice rule to New Mexico cases involving occurrence policies, finding that public policy considerations underlying the actual-notice rule apply equally to claims-made-and-reported policies. In addition, when an insurer receives actual notice of a claim, the court held that the insurer must investigate the claim to determine if it has a duty to defend and may protect its interests by contacting the insured to determine whether the insured wants the insurer’s assistance. The duty to defend lasts unless and until the insurer receives a judicial determination relieving it of any further obligations or the insured waives the defense.

Because the insured plausibly alleged that the insurer received actual notice of the potential claim but failed to investigate its duty to defend prior to the expiration of the first policy period, the court allowed the insured’s breach of contract, bad faith, unfair claims practices, and declaratory judgment claims to proceed.

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