Livingston v. Auto Owners Ins. Co.

• Decision Date: 19 April 1991
• Citation: 582 So.2d 1038
• Parties: Wanda LIVINGSTON v. AUTO OWNERS INSURANCE COMPANY, et al. 89-829.
• Court: Alabama Supreme Court

Page 1038

582 So.2d 1038

Wanda LIVINGSTON v. AUTO OWNERS INSURANCE COMPANY, et al.

89-829.

Supreme Court of Alabama.

April 19, 1991.

Rehearing Denied June 14, 1991.

Jere L. Beasley and Kenneth J. Mendelsohn of Beasley, Wilson, Allen, Mendelsohn & Jemison, Montgomery, for appellant.

Michael B. Beers and Michael S. Jackson of Beers, Anderson, Jackson & Smith, Montgomery, for appellees.

ADAMS, Justice.

This is an appeal from a summary judgment entered in favor of Auto Owners Insurance Company (hereinafter "Auto Owners") on Wanda Livingston's claim for damages based on an alleged bad faith failure to pay benefits under a fire insurance policy. Mrs. Livingston's claim based on breach of contract was settled shortly before trial when Auto Owners stipulated that she was entitled to a judgment as a matter of law on that claim. We reverse and remand.

Viewed most favorably to the plaintiff, the evidence before the court on the summary judgment motion would suggest the following facts:

In 1983, Wanda Livingston, who owned a house in Montgomery, purchased a second house in Tallassee, Alabama, and she and her husband, William K. Livingston, moved into that house. Sometime later, due to an automobile accident in which Mr. Livingston was injured, the Livingstons moved back to their Montgomery house so that they could be closer to Mr. Livingston's bail bond business, which was located in Montgomery. While the Livingstons initially contemplated selling the Tallassee house, they decided that they wanted to live there after retirement and decided to rent the house rather than sell it. Mrs. Livingston rented the house to Mr. and Mrs. Doug Goodwin for $600 per month.

When Mrs. Livingston first purchased the Tallassee house, she insured it through the Cousins Insurance Agency. In 1988, Cousins refused to renew the policy because the Livingstons were not occupying the house. Mrs. Livingston then contacted the Palomar Insurance Company seeking to insure the house. Mrs. Livingston informed the Palomar agent, Gayle Coltrain, that the Livingstons were not living in the Tallassee house at that time. Ms. Coltrain contacted Auto Owners to see if it would write a policy for 100% replacement cost coverage even though the Livingstons were not living in the house at the time. Auto Owners informed Ms. Coltrain that it would write such a policy. Ms. Coltrain filled out and submitted an Auto Owners application and an "Auto Owners Residential Replacement Cost Estimator" pursuant to the "Auto Owners Residential Replacement Cost Guide."

While the house had originally been insured with the Cousins Agency for $156,000, Ms. Coltrain determined that the replacement cost of the house was in excess of $186,000 and that the house had been underinsured at the previous coverage of $156,000. Ms. Coltrain submitted the application for coverage based on a $185,000 replacement cost. Auto Owners issued the policy, with an effective date of February 18, 1988. The premiums were based on the $185,000 replacement cost.

During the night of May 14, 1988, Mrs. Livingston's Tallassee house was totally destroyed by fire. At this time, the Goodwins were occupying the house. It was later determined that the fire was caused by flammable liquids that had been poured throughout the house. Mrs. Livingston was told of the fire on the morning of May 15, 1988. After visiting the scene, she notified Ms. Coltrain, who informed Auto Owners of the loss. The Auto Owners adjuster, Mr. Ken Vaughn, determined that the house was a total loss. Apparently, because of the suspicious nature of the fire and because it could not handle the investigation, Auto Owners hired an independent adjuster, an appraiser, and a fire investigator to investigate the cause of the fire and to investigate the claim filed by Mrs. Livingston. Auto Owners' own agents also did some investigation regarding the claim, and the state fire marshal also investigated the fire and its cause.

Auto Owners asked the fire investigator, Mr. Richard Keith, to conduct a "cause and origin" investigation and a full "courthouse and financial" check. Mr. Keith conducted a full investigation of the scene, which included removing debris and sending it to a testing laboratory for analysis. Mr. Keith also met with the Livingstons, who executed an authorization form allowing him access to records and information pertaining to the Livingstons' financial transactions with banks, savings institutions, governmental agencies, and creditors. While the Livingstons authorized Mr. Keith to investigate their personal affairs, Mr. Livingston would not allow an examination of records relating to his business. However, Mr. Keith never requested specific records from the Livingstons, but rather requested only that they sign the blanket authorization form.

Mr. Keith submitted several reports to Auto Owners detailing his findings. Included in these reports were recorded statements of the Livingstons and the Goodwins, diagrams of the house, and various items related to the Livingstons' finances. Mr. Keith found that while there appeared to be some items belonging to the Goodwins missing from the Tallassee house, such as guns and some clothes, there was no direct evidence that indicated that the Livingstons had started the fire. On July 6, 1988, in his final report, Mr Keith indicated that he had completed his work and had uncovered no evidence as to who started the fire. On August 9, 1988, Mr. Keith closed his file on the matter.

The independent adjuster hired by Auto Owners, Mr. Fountain, was conducting his investigation at the same time Mr. Keith was conducting his investigation. Mr. Fountain also spoke with the Livingstons and visited and examined the burned house. He measured the house and photographed it. He determined that the house had contained 5,200 square feet. Mr. Fountain never found any evidence, and did not indicate in any of his reports that the Livingstons were responsible for the fire.

As part of his report to Auto Owners, Mr. Fountain estimated the total replacement cost of the house at $260,000. This figure was calculated by multiplying 5,200 square feet by $50, an estimated building cost per square foot. Mr. Fountain further determined the actual cash value of the house (replacement cost minus depreciation) to be $208,000. The policy issued by Auto Owners provided that if the owner decided to rebuild the house then the owner was entitled to the full replacement cost. If, however, the owner chose not to rebuild, the owner was entitled only to the cash value.

The appraiser hired by Auto Owners, Ms. O'Daniel, appraised the destroyed house as Mr. Fountain completed his work. She based her appraisal on a $40 per square foot value. Her appraisal also reduced the value of one room of the house to $15 per square foot and showed a lower total square footage than Mr. Fountain's calculations.

By July 15, 1988, the investigations of Mr. Keith and Mr. Fountain were complete. Also, on July 15, 1988, the state fire marshal completed his investigation. His report specified that the cause of the fire was incendiary, but he reported no evidence to indicate that the Livingstons were responsible. Auto Owners, nevertheless, continued its investigation. Pursuant to the request of Auto Owners' attorney, the Livingstons provided sworn statements and made certain personal financial information available to Auto Owners. Auto Owners still had no evidence indicating that the Livingstons were responsible for the fire.

On August 16, 1988, with her claim unpaid, Mrs. Livingston sued Auto Owners, alleging breach of contract, misrepresentation, and bad faith failure to pay, and seeking compensatory and punitive damages. Auto Owners petitioned to have the case removed to federal district court and filed its answer in federal court. Auto Owners counterclaimed, seeking declaratory relief in the form of an order dismissing Mrs. Livingston's complaint. The case was remanded to the state court. Once back in the state court, and before any discovery, Auto Owners filed a motion for summary judgment and a motion to stay all proceedings until the trial court could rule on the motion for summary judgment. The trial court granted the motion to stay for 30 days to allow Auto Owners to decide whether to adjust the claim or to deny payment. Auto Owners decided to proceed with adjustment of the claim.

Auto Owners' adjuster, Mr. Vaughn, offered Mrs. Livingston $138,400 based on the appraisal Auto Owners had received from Ms. O'Daniel. This figure was about $70,000 less than the value calculated by Mr. Fountain. Mrs. Livingston refused this offer.

Auto Owners then petitioned this Court for a writ of mandamus to address the following issues:

"(1) Whether an insurer can enforce conditions precedent within its contract of insurance, particularly where the insurer is conducting a comprehensive investigation of a suspicious fire loss of incendiary origin.

"(2) Whether, in addition to clear and unambiguous contract provisions, public policy dictates that an insurer be allowed sufficient opportunity to conduct an investigation of a suspicious fire loss, before an insured can bring a lawsuit for bad faith, fraud and breach of contract.

"(3) Whether an insured owes the insurer a duty to cooperate in good faith while the insurer is attempting a comprehensive investigation of a suspicious fire loss of incendiary origin.

"(4) Whether an insurer can be forced to trial defending allegations of bad faith, fraud and breach of contract, when in fact the insured has not complied with clear and unambiguous conditions precedent under a contract of insurance.

"(5) Whether an insurer can be forced to adjust a claim and complete an investigation under the constraints of a premature lawsuit alleging bad faith, fraud and breach of contract filed prior to the claim becoming due and payable under clear and unambiguous terms of the contract of insurance.

"(6) Whether an insurer can be...