State Farm Fire & Casualty Co. v. Slade

• Decision Date: 27 August 1999
• Citation: 747 So.2d 293
• Court: Alabama Supreme Court
• Parties: STATE FARM FIRE & CASUALTY COMPANY v. Gaines B. SLADE and Ina Slade. Gaines B. Slade and Ina Slade v. State Farm Fire & Casualty Company.

747 So.2d 293

STATE FARM FIRE & CASUALTY COMPANY v.Gaines B. SLADE and Ina Slade.

Gaines B. Slade and Ina Slade v.State Farm Fire & Casualty Company.

1970.

Supreme Court of Alabama.

August 27, 1999.

Rehearing Applications Denied October 29, 1999.

Micheal S. Jackson, Michael B. Beers, and Winston W. Edwards of Beers, Anderson, Jackson, Nelson, Hughes & Patty, P.C., Montgomery, for appellant/cross appelleeState Farm Fire and Casualty Company.

Roger S. Morrow, Wesley Romine, and Chandra C. Wright of Morrow, Romine & Pearson, P.C., Montgomery, for appellee/cross appellantsGaines B. Slade and Ina Slade.

On Application for Rehearing

LYONS, Justice.

The opinion of February 12, 1999, is withdrawn and the following is substituted therefor.

This case involves allegations of misrepresentation, suppression, deceit, breach of contract, and bad faith, all arising from the sale of a homeowner's insurance policy and the adjustment of a claim on that policy.Gaines B. Slade and Ina Slade sued State Farm Fire & Casualty Company after State Farm had denied their insurance claim based on damage to their home.

Facts and Procedural History

In March 1992, the Slades undertook construction of their home in Montgomery.The Slades paid approximately $650,000 for the construction.During the construction of their home, the Slades' next-door neighbors commenced construction of a home and removed a substantial amount of soil from their lot.The soil removal created a severe drop-off between the neighbors' property and the Slades' property.This drop-off required the Slades to construct a retaining wall on the property line, along the drop-off, to prevent erosion and soil movement.This retaining wall was attached to the Slades' home.

On January 16, 1993, the Slades purchased a State Farm"Homeowner's Extra" policy.This policy was in effect at the time of the occurrence of the events later made the basis of the Slades' insurance claim.On August 4, 1993, the retaining wall collapsed when lightning struck it during a severe storm.The collapse of the wall caused the ground around the Slades' backyard pool to give way; this resulted in extensive damage to the pool area.State Farm paid for the repairs to the Slades' pool and for the replacement of the wall and of the soil that was washed away during the storm.Soil was replaced up to three feet from the corner of the Slades' home, but no soil was replaced under the slab area of the home.

In October 1993, the Slades noticed cracking in the ceilings and in the interior and exterior walls of their home.They informed State Farm of this cracking on November 8, 1993.On November 15, 1993, David Majors, a State Farm claims adjuster, went to the Slades' home and examined the cracks in the walls and ceilings and in the exterior of the home.Mr. Slade told Majors that he had contacted Walter Riley, the contractor who had rebuilt the Slades' pool and retaining wall, and had asked him to monitor the cracks and possible ground movement around his home to determine if any ground movement was causing the cracking.Riley contacted three firms to have them determine the cause of the cracking and give estimates for repair.When Mr. Slade talked with Majors, Mr. Slade attributed the cracking to the fact that lightning had struck the retaining wall and caused it to collapse.The Slades believed that the damage was covered by the terms of their policy, which covered damage directly caused by lightning.¹

The three firms began their work in November 1993.Because the firms did not complete their reports by Christmas, the Slades asked State Farm and the firms to suspend work until after the Christmas holidays.By January 19, 1994, State Farm had received all three reports stating the cause of the damage, the repairs needed, and the estimated cost of the repairs.All three of these reports stated that the cause of the cracking at the Slades' home was that the soil beneath the home had moved by settling or shifting and that this movement had caused the foundation to move, thereby causing the cracks.The reports also said that the soil had moved as a result of the collapse of the retaining wall after lightning struck it.

Sometime after January 1, 1994, State Farm became concerned that the cracking in the Slades' home might not be covered under their policy because the policy contained an exclusion for losses caused by "earth movement."Although the policy covered damage to the Slades' property proximately caused by lightning, Di Williams, Majors's claims supervisor, believed that the Slades' claim presented a "concurrent-causation question," meaning that there was a question whether the two events, the lightning and the earth movement, had combined to cause the Slades' loss.According to State Farm, any loss caused by earth movement was not covered, because the Slades' policy excluded coverage of damage caused by earth movement.This earth-movement exclusion states:

"2.We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events.We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as the result of any combination of these:

". . . .

"b.Earth Movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not.Earth movement includes, but is not limited to earthquake, landslide, mudflow, sinkhole, subsidence and erosion.Earth movement also includes volcanic explosion or lava flow, except as specifically provided in SECTION I—ADDITIONAL COVERAGES, Volcanic Action."

(Emphasis in original.)

On January 13, 1994, Williams and Majors conferred with State Farm's claims superintendent in Montgomery, Pat Craig, about the earth-movement exclusion.Williams telephoned State Farm's in-house legal counsel, James Swift, to brief him on the facts of the Slades' claim and to discuss the concurrent-causation question.Mr. Swift asked her what the engineer's report stated regarding the cause of the Slades' loss.Williams told Mr. Swift that State Farm did not have an engineer's report.Williams then wrote a note to Majors on State Farm's claims log, telling him to contact the Slades for the purpose of getting an engineer's report and to tell the Slades that State Farm would review the engineer's report and "get back with them on coverage."The note also told Majors not to commit to coverage.Majors never told the Slades about the possible coverage questions.

After the conversation with Swift on January 13, 1994, Williams, Majors, and Craig believed that the Slades' loss was covered under the policy only if the lightning had directly hit either the Slades' home or the soil underneath their home.Also at this time, Craig and Williams assumed the main responsibilities in the adjustment of the Slades' claim.

On January 19, 1994, Craig received the last of the three initial reports regarding the cause of the damage at the Slades' home, and the cost of repair.On that day, Craig wrote in the log of the Slades' claim: "Received report from Quality Assurance Testing Laboratories, states earth movement, does not state cause due to lightning, need to write letter to insured to bring up to date on where we are."He also received a telephone call from Riley, the contractor, about hiring an engineer.Craig made a note of this call in the claims log, and, according to the Slades, wrote "not insured."However, at trial, Craig testified that he could not read his own handwriting and was unsure of his notation.

Craig testified that the three initial reports gave him "serious concerns" as to whether the Slades' claim was covered under their policy.He told Riley that he would find a structural engineer who would determine if the lightning was the direct cause of the damage.On January 24, he sent a letter to in-house counselJames Swift indicating that the reports addressed earth movement and not direct lightning contact with the soil.Craig again stated that he wanted to contact a structural engineer in order to learn whether the cracking at the Slades home was direct damage from lightning.Craig testified that he was concerned that the three initial reports were not thorough.However, Craig never talked to anyone who prepared the initial reports.

On January 28, 1994, Craig telephoned J.A. "Buck" Durham, a structural engineer.Craig said he had never used Durham before and that he got his name from Harry Dillinger, a State Farm claims superintendent in Huntsville.Craig did not inquire about Durham's expertise.Instead, he relied on Dillinger's recommendation that Durham was qualified to address the problems at the Slades' home.Craig set a date, February 2, 1994, for Durham to travel to Montgomery to conduct an "independent investigation" of the Slades' claim.Craig later obtained the Slades' permission for Durham to inspect their home.The Slades thought Durham would conduct the inspection to determine how to repair their home.However, at this time Craig did not inform the Slades—nor had he informed them before —that their claim might not be covered under their policy.

Either during or after Craig's first conversation with Durham, Durham filled out an "Insurance Engineering Inspection Form."In that form, Durham wrote that the Slades' home was worth $500,000 and that the type of claim was "severe cracking —interior/exterior—possible soil problem."However, Craig denied giving Durham that information and testified that he told Durham that there was "some interior cracking" in the Slades' home.²Also, although State Farm has consistently maintained that its usual...