Prejudgment Interest Pushes Recovery Over Policy limits
State Farm Mutual Automobile Insurance Company appealed from a Superior Court order awarding Enrique costs and prejudgment interest on the insured's uninsured motorist (UM) benefits claim. The Delaware Supreme Court handled the appeal. This case is State Farm Mutual Automobile Insurance Company v. Enrique, 2011 WL 1004604 ( Del. ).
This action arose out of a claim for UM benefits under a personal auto policy issued by State Farm to Jason Garber. Enrique was driving Garber's car with permission when she was hit by Roy. The parties do not dispute that Roy's negligence caused the accident or that Enrique qualified for UM coverage under Garber's policy. The State Farm policy provided for $100,000 in single limits UM coverage, and Enrique filed a complaint against State Farm for damages under the UM coverage. State Farm advanced $25,000 to Enrique after negotiations between the parties broke down. Following the development, Enrique demanded an additional $65,000 and State Farm rejected the demand and the dispute went to trial.
After a three day trial, a jury returned a verdict for $260,000 in Enrique's favor. Following trial, Enrique filed a motion to assess expert witness fees, court costs, and prejudgment interest against State Farm. The judge awarded the court costs, expert fees, and prejudgment interest. The judge held that an award of prejudgment interest added to damages could exceed the UM policy limits. State Farm objected and appealed, claiming that prejudgment interest is an element of damages. Because the policy limits the maximum recoverable under UM to the bodily injury damage limits of $100,000, and prejudgment interest is an element of damages, the policy limit of $100,000 caps Enrique's recovery.
The Delaware Supreme Court noted that state law set forth certain requirements that a claimant must meet in order to qualify for prejudgment interest: the action must be a tort action; the claimant must have made and held open a demand for settlement for 30 days; and the damages determined at trial must exceed the amount plaintiff agreed to accept for settlement. If these elements are met, then a trial judge would ultimately calculate the contested prejudgment interest based on the extent of damages—not the existence of or terms of coverage. However, when prejudgment interest is awarded based on UM coverage, then the award of prejudgment interest can be greater than the UM policy limits.
The court found that in this case, Enrique met all the requirements under the law. She offered to settle the case before trial for an additional payment of $65,000; State Farm rejected the demand and it remained open for 30 days; and the trial jury awarded a verdict in the amount of $260,000 which clearly was in excess of the demand. Therefore, the trial judge had to award prejudgment interest according to state law.
The court held that just as State Farm must pay ordinary court costs and fees that are beyond the limits of liability, it must also pay prejudgment interest costs. The contracted policy limit forms the basis for the prejudgment interest award, but does not set the cap for recovery on litigation costs and fees. The court said that prejudgment interest is an expense associated with the defense costs and strategy and as such, prejudgment interest does not constitute an element of damages controlled by the UM coverage limits. The ruling of the Superior Court was affirmed.
Editor's Note: The dispute in this case centered on the status of prejudgment interest: is it a litigation cost or an element of damages? The standard personal auto policy does not address this issue so the Delaware Supreme Court relied on state law and the facts of this case to find that such interest payments are considered litigation costs. As such, prejudgment interest can be seen as a supplementary payment which does not reduce the policy limits of liability. Therefore, if a prejudgment interest award pushes the final recovery payment over declared policy limits, that is acceptable in Delaware.