Dunlap v. State Farm Fire & Casualty Company

Supreme Court of Delaware · 2005 · Corporations

878 A.2d 434 (Del. 2005)

Updated August 22, 2026

CorporationsInsuranceImplied covenant of good faith and fair dealingUnderinsured motorist coverageUIMexhaustion requirementbad faith refusal to payimplied covenant

Facts

Anne Dunlap suffered severe, permanent injuries as a passenger in a car that collided with a DART bus. The Dunlaps had $1 million in UIM coverage with State Farm; Cardillo's insurer paid its policy limits, and DART offered to settle for $175,000 even though it contested liability. Concerned that settling for less than DART's $300,000 limits might jeopardize UIM benefits, the Dunlaps asked State Farm to agree that such a settlement would not prejudice their UIM claim, but State Farm refused based on the exhaustion requirement. The Dunlaps then tried the case against DART, lost as to DART, and afterward State Farm paid the $1 million UIM limits.

Issue

Whether the Dunlaps stated a claim against State Farm when State Farm refused to waive the statutory and contractual exhaustion requirement for UIM coverage. More specifically, the question was whether the implied covenant of good faith and fair dealing in an automobile insurance policy can support a claim other than a classic bad-faith denial or delay in payment.

Rule

A bad-faith refusal-to-pay insurance claim under Delaware law requires an unjustified failure to investigate, process, or pay a claim, and the denial of benefits must be clearly without any reasonable justification. But the implied covenant of good faith and fair dealing in insurance contracts is broader than that cause of action: it requires the insurer to refrain from arbitrary or unreasonable conduct that deprives the insured of the fruits of the bargain and may prevent an insurer from relying on an exhaustion provision absent a realistic risk of prejudice.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Dover, Melissa Grant carried $500,000 in underinsured-motorist coverage through Harbor Pine Insurance. After a collision, one tortfeasor's insurer offered $90,000 on a $150,000 policy despite disputing liability, and Melissa asked Harbor Pine to confirm that accepting the offer would not defeat any later UIM claim. Harbor Pine refused, citing the policy's exhaustion clause; Melissa then litigated, recovered nothing from that tortfeasor, and only afterward received her full UIM limits from Harbor Pine.

Melissa sues Harbor Pine alleging bad-faith refusal to pay. What is the strongest assessment of that claim?

Explanation. A traditional first-party bad-faith insurance claim requires an unjustified failure to investigate, process, or pay a claim, and the denial of benefits must be clearly without reasonable justification. Here, the insurer relied on the exhaustion requirement and paid after exhaustion, so this is not a classic refusal-to-pay case. But the implied covenant is broader than claim payment and may reach arbitrary conduct that deprives the insured of the fruits of the bargain.