September 20, 2011 – Lydia and Patrick Nellis, for themselves and all others similarly situated v. Farmers Insurance Company of Arizona, No. 29,295

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number:
Filing Date: 	September 20, 2011
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.
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 Automobile
Insurance 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
{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

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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

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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 periods if the premium is paid when due.” Monthly premiums

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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

5
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 wilfully 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

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decision. The Class’s 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

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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

8
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.”
{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.

9
{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 Insurance 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.

10
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 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.

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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,

12
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.” 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)).

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{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

14
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 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

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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

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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 generally—and the Prematic service

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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

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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.

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{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 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

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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.

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{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.
{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

22
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.

23
{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.
(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.

24
{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
Western Farm Bureau Mutual Insurance 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

25
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 American Institute of Marketing Systems, 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’ 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.

26
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,

27
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;
(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.

28
{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,

29
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:
JAMES J. WECHSLER, Judge
CYNTHIA A. FRY, Judge