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Dunlap v. State Farm Fire and Casualty Co.7/5/2005
a way that honors the insured's reasonable expectations.
D. State Farm's Conduct as Breach of the Implied Covenant
The exhaustion provision in State Farm's policy, like the statute, expresses that UIM coverage is secondary, or excess, coverage that becomes payable after there is a determination that: (i) a third party was liable for the injuries sustained by the insured, (ii) the tortfeasor(s) vehicles were underinsured, and (iii) the insured has recovered on all available primary liability policies. Often the exhaustion requirement will protect the insurer from having to engage in expensive litigation to determine, for example, who is responsible for the accident or the extent of the insured's damages.
In such circumstances, it would be reasonable to expect the insurer to invoke the exhaustion provision, and by doing so the insurer would not face potential liability for breaching the implied covenant of good faith and fair dealing. The covenant does not, after all, require an insurer to risk financial exposure in order to assist the insured.
Nonetheless, although "the obligation of good faith does not require the insurer to relieve the insured of all possible harm that may come from his choice of policy limits, it does obligate the insurer not to take advantage of the unequal positions in order to become a secondary source of injury to the insured." Here, it was inferable, if not apparent, from the pleaded facts that State Farm faced no possible financial exposure or prejudice if it agreed to waive the exhaustion requirement to enable Dunlap to settle with DART for $125,000 below its policy limits. State Farm was informed, and easily could verify, that Anne was not at all responsible for the accident and that her severe, permanent injuries would far exceed the total of all available policy limits. Thus, whether the Dunlaps received nothing or the full $300,000 policy limits from DART, State Farm still would have had to pay the $1 million limit of its UIM policy. It thus appears arguable that by refusing to agree to the $175,000 DART settlement, State Farm was not advancing any interest of its own, and had become a secondary source of injury to the Dunlaps.
Because the Dunlaps' claim may implicate a breach of State Farm's duty under the implied covenant of good faith and fair dealing, the dismissal of their complaint should be reversed and the case should be remanded to afford an Dunlaps the opportunity to plead a claim founded on the covenant. Just as an insurer may not rely on a notice provision to deny coverage except where it was prejudiced by the insured's lack of notice, so, too, an insurer may not rely on an exhaustion provision absent a realistic risk of prejudice. In these circumstances, the Dunlaps may possibly have a claim that State Farm knew, or should have known, that the implied covenant of good faith and fair dealing required that it not arbitrarily prevent its own insured from obtaining the fullest possible recovery for her injuries where State Farm faced no realistic prejudice. Nothing in this Opinion should be read as a "pre-approval" of any claim for breach of the implied covenant of good faith and fair dealing. Whether or not the Dunlaps are able to plead a legally cognizable claim must be determined in light of the specific allegations of whatever amended complaint (if any) that they file.
Conclusion
Based on the foregoing, the judgment of the Superior Court is affirmed in part and reversed in part. This matter is remanded for further action in accordance with this opinion. Jurisdiction is not retained.
RIDGELY, Justice, concurring in part, dissenting in part:
I agree with and
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