The Arizona Supreme Court has ruled that a policy exclusion for personal liability “under any contract or agreement” did not relieve an insurer of the obligation to defend its insured, an alleged builder-vendor, against a claim for negligent excavation brought by a home buyer.
The Case
Dennis Teufel hired Carmel Homes Design Group to build a mountainside home on a vacant lot in Paradise Valley, Arizona (the “Longlook Property”). Mr. Teufel intended to reside at the Longlook Property, and at the start of construction he purchased a homeowners' insurance policy from American Family Mutual Insurance Company that insured against personal liability.
Mr. Teufel changed his mind about living at the Longlook Property and, after construction was completed, he sold the property to Cetotor, Inc., and the homeowners' policy coverage ended.
Mr. Teufel purchased a home in Scottsdale (the “82nd Place Property”), moved in, and bought a new homeowners' insurance policy from American Family.
After rockslides damaged the Longlook Property, allegedly as the result of improper excavation during construction, Cetotor sued Mr. Teufel, alleging that he was a builder-vendor and asserting breach of contract and negligence claims.
Mr. Teufel tendered defense of Cetotor's complaint to American Family under the 82nd Place Property insurance policy.
After American Family declined the tender, Mr. Teufel sued.
The trial court granted summary judgment in favor of American Family. Although it found that the property damage from the August 2012 rockslide was an “occurrence” during the 82nd Place Property policy period, the trial court ruled that there was no coverage as a result of the policy's “contractual liability” exclusion. As a result, American Family had no duty to defend.
The court of appeals disagreed with the trial court that the contractual liability exclusion applied, and the dispute reached the Arizona Supreme Court.
The American Family Policy
The American Family policy's contractual liability exclusion to personal liability coverage provided:
Contractual Liability. We will not cover personal liability under any contract or agreement.The Arizona Supreme Court's Decision
The court held that the contractual liability exclusion did not relieve American Family of the obligation to defend Mr. Teufel, an alleged builder-vendor, against the negligent excavation claim brought by Cetotor.
In its decision, the court explained that the contractual liability exclusion applied to personal liability required by or originating from a contract but that it was not triggered “simply because a contract brought the injured party and the insured together.”
The court reasoned that the exclusion would not apply if, for example, an insured under the policy contracted with a business to replace a car's windshield but negligently failed to warn the business that a vicious dog was in the car, resulting in the insured's personal liability for a bitten worker's injuries. The worker's negligence claim would “stand alone” from the contract, the court said.
The court then observed that, in addition to its contract claim, Cetotor had alleged a standalone tort claim when it alleged that “[a]s a builder-vendor,” Mr. Teufel had “negligently performed or negligently supervised the hillside grading and slope cut” for the Longlook Property, which resulted in property damage including “damage to the outside HVAC units, broken bay windows, broken interior marble flooring, damage to the exterior stucco, [and] costs to remove rock.”
The court rejected American Family's contention that Cetotor's negligence claim was not a standalone claim because the duty underlying that claim had been created solely by the real estate purchase contract. Rather, the court found, Cetotor's negligence claim rested on a builder's “common law duty to construct a home as a reasonable builder would.” That claim, the court added, did not seek contract damages for defects in the excavation but instead sought “compensation for property damage caused by the negligent excavation.” Any personal liability imposed on Mr. Teufel would not be required by or originate from the contract with Cetotor, according to the court.
In sum, the court concluded that the contractual liability exclusion did not relieve American Family of its duty to defend Mr. Teufel against Cetotor's negligence claim. Therefore, American Family had to defend Mr. Teufel against all claims alleged by Cetotor unless another exclusion applied or other facts took the case outside policy coverage.
The case is Teufel v. American Family Mutual Ins. Co., No. CV-17-0190-PR (Ariz. June 14, 2018). Attorneys involved include: Michael J. Raymond (argued), Raymond, Greer & McCarthy, P.C., Scottsdale; Steven S. Guy, The Guy Law Firm, P.L.L.C., Scottsdale, Attorneys for Dennis E. Teufel
Lynn M. Allen (argued), Arman R. Nafisi, Tyson & Mendes, LLP, Phoenix, Attorneys for American Family Insurance Company and Kerry V. Hanson.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].