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Dunlap v. State Farm Fire and Casualty Co.7/5/2005
because he was a passenger in Schwartz's car. Both men submitted demands for policy limits to the primary insurer and State Farm. Weinstein obtained full payment from the primary insurer, and concluded his arbitration with State Farm before Schwartz. Without notifying Schwartz, State Farm paid Weinstein approximately $1.5 million of the $2 million in available excess coverage. A few months later, when Schwartz received full payment from the primary insurer, he notified State Farm and was paid the remaining $471,960.
Schwartz sued State Farm, alleging that State Farm knew "to a reasonable degree of certainty" that the two claims would exceed all available policy limits but failed to take any steps to protect Schwartz's claim. State Farm argued that it had no duty to Schwartz until such time as the primary insurance was exhausted, and that it complied with its duty to pay as soon as the exhaustion requirement was satisfied. The Schwartz court disagreed, holding that State Farm breached the implied covenant of good faith and fair dealing:
We conclude that the duty applies to an excess insurer, just as it does to a primary insurer. We reject the notion that, simply because a condition precedent to a particular obligation -- the obligation to pay -- has not yet occurred, the insurer is relieved of the implied covenants that inhere in every contract.
The court continued:
There was no doubt that the Schwartzes' claim would be covered by the State Farm policy once the primary insurer exhausted policy limits. As an excess insurer, State Farm, like any other insurer, was obliged under the implied covenant of good faith and fair dealing to do nothing to impair the Schwartzes' right to the benefits of the agreement. Payment in full to its other insured, the Weinsteins, might well impair those rights if that payment prevented the Schwartzes from receiving a fair share of benefits under the policy. That is for jury determination at trial.
Other jurisdictions, using similar reasoning, have found breaches of the implied covenant of good faith and fair dealing based on conduct other than a failure to process or pay claims promptly. For example, in Rawlings v. Apodaca, the Arizona Supreme Court noted that, " he implied covenant is breached, whether the carrier pays the claim or not, when its conduct damages the very protection or security which the insured sought to gain by buying insurance." In that case, the insurer withheld an investigative report that its insured needed to assert a claim against the tortfeasor, who was insured by the same carrier. See, also: Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278, 283 (Tex. 1994) (holding that insurer breaches implied covenant of good faith and fair dealing when it cancels insured's health policy without reasonable basis.)
Delaware, likewise, recognizes that the covenant of good faith and fair dealing implied in all contracts comprehends duties other than the duty to promptly process and pay claims. Our courts have held that the covenant also requires an insurer to notify its insured of the policy's limitations period if that time limit is shorter than the applicable State statute of limitations. Similarly, an insurer may not deny coverage based on an insured's failure to give notice of a claim unless the insurer establishes that it was prejudiced by the lack of notice. In sum, the implied covenant of good faith "'is the obligation to preserve the spirit of the bargain rather than the letter, the adherence to substance rather than form....'" It requires more than just literal compliance with the policy provisions and statutes. The implied covenant of good faith and fair dealing requires that the insurer act in
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