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Dunlap v. State Farm Fire and Casualty Co.7/5/2005
Submitted: December 10, 2004
Corrected: July 13, 2005
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS, and RIDGELY, Justices, constituting the court en banc.
Upon appeal from the Superior Court. AFFIRMED IN PART; REVERSED IN PART and REMANDED.
In this appeal, we consider whether, with respect to automobile insurance policies, the implied covenant of good faith and fair dealing encompasses claims other than for "bad faith" in denying or delaying payment of benefits. Anne Dunlap, the insured, suffered catastrophic injuries in a car accident. She asked State Farm Fire and Casualty Company, her underinsured motorist (UIM) insurer, to agree that it would not deny coverage if she settled with a potential tortfeasor whose liability was questionable. State Farm refused, thereby causing Dunlap to litigate her claim against the tortfeasor (unsuccessfully) and lose more than $175,000. Dunlap sued State Farm, alleging that it acted in bad faith. The Superior Court dismissed her complaint, with prejudice. We agree that the complaint does not allege a bad faith claim for delay or denial of insurance, since it does not charge State Farm with failure to investigate, process, or pay a claim without reasonable justification. The complaint, however, does allege facts suggesting that State Farm breached the implied covenant of good faith and fair dealing by depriving Dunlap of a third party recovery without any justification and without any potential financial exposure. Accordingly, we remand with instructions to enter an order dismissing without prejudice, giving Dunlap the right to replead, if she can, in accordance with the principles discussed in this decision.
Factual and Procedural Background
On August 7, 1998, Anne Dunlap was a passenger in Mark Cardillo's car when he made a left turn in front of a Delaware Transit Corporation (DART) bus. The bus collided with the car, striking the passenger door. Anne suffered severe and permanent injuries that left her partially paralyzed. She incurred hundreds of thousands of dollars in medical expenses.
In August 2000, Anne and her parents filed suit against Cardillo, DART, and Monte Wood, the bus driver. The Dunlaps had a policy with State Farm that provided $1 million in UIM coverage. The policy covering Cardillo's car had a single liability limit of $500,000, and DART had a single liability limit of $300,000. Cardillo's insurer paid the Dunlaps and the other injured parties the limits of its coverage almost immediately in light of the seriousness of the injuries and its insured's probable liability. DART contested liability, but nevertheless, following August 2001 negotiations, offered to settle with the Dunlaps for $175,000.
The Dunlaps, worried about jeopardizing their UIM coverage, wrote to State Farm seeking assurance that if they settled for less than the DART policy limits, without exhausting "all bodily injury bonds and insurance policies available," they would not be denied underinsurance benefits:
In my opinion, the Cardillo vehicle is an "underinsured motor vehicle," as defined [by Delaware law], regardless of whether any settlement with DART exhausts DART's $300,000 limit. I would like to have State Farm's agreement that the Dunlaps may settle with DART for less than $300,000 without prejudicing the Dunlaps' UIM claim. Of course, I will not assert that the DART bus is an "underinsured motor vehicle" unless we exhaust the $300,000 coverage.
The Dunlaps wrote similar letters the following month, noting that Anne was hemiplegic and had already incurred more than $500,000 in medical expenses. In December 2001, State Farm refused to agree t
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