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Arizona Supreme Court Holds Contractual Liability Exclusion Does Not Apply to Breach of Duty to Reasonably Construct Home

Categories: Insurance Litigation, Blog

Contractual Liability Exclusion Does Not Apply to Breach of Duty to Reasonably Construct Home

The Holding

In Teufel v. Am. Family Mut. Ins. Co., 244 Ariz. 383, 419 P.3d 546 (2018), the Arizona Supreme Court recently held that a Contractual Liability Exclusion in homeowner policies did not apply to a claim for negligent excavation against the Insured, an alleged builder-vendor, because the claim arose from the Insured’s alleged breach of a common law duty to construct a home as a reasonable builder rather than solely from the contract between the Insured and the plaintiff.

The Takeaway

  • The Contractual Liability Exclusion in a homeowners policy does not preclude an insurer’s duty to defend a breach of contract claim against an insured when pled with a tort claim arising from a common law duty that exists independent of the contract, even if the tortious conduct would not have occurred but for the contract between a plaintiff and an insured
  • The Court’s ruling is consistent Desert Mountain Properties Ltd. P'ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 236 P.3d 421, (Ct. App. 2010), aff'd, 226 Ariz. 419, 250 P.3d 196 (2011), in which the Court of Appeals held a Contractual Liability Exclusion in a CGL policy did not automatically bar coverage for claims involving contracts.

The Facts

The Insured hired a design group, with which he had a loose partnership, to build a mountainside home on a vacant lot.  The Insured ultimately sold the mountainside home, moved into another home, and bought a homeowner’s policy.  The Policy provided coverage for “compensatory damages for which any insured is legally liable” because of “bodily injury or property damage caused by an occurrence.”  Rockslides subsequently occurred at the home and damaged the purchaser’s property.  The purchaser alleged that improper excavation during construction caused the rockslides.  The purchaser sued the Insured,  alleged the Insured was a builder-vendor, and asserted claims for breach of contract, negligence, and fraud. After the Insurer declined coverage, the Insured sued the Insurer for damages and declaratory relief.  The trial court granted summary judgment in favor of the Insurer.  Although the trial court determined the rockslides were an “occurrence” during the Policy period, it held the Contractual Liability Exclusion precluded coverage.  The Arizona Court of Appeals reversed, holding the Contractual Liability Exclusion did not apply.  The Arizona Supreme Court affirmed the Arizona Court of Appeals.

The Rationale

  • In affirming the Arizona Court of Appeals’ determination that the Contractual Liability Exclusion did not bar coverage for tort claims, the Arizona Supreme Court reasoned:
  • The Contractual Liability Exclusion precluded coverage for “personal liability under any contract or agreement”, but did not define “under.”  The Supreme Court referred to Webster’s definitions of “under” in the contractual context, which are “required by,” “in accordance with,” and “bound by.”  Applying these definitions, it concluded, “the contractual liability exclusion applies to personal liability required by or originating from a contract; it is not triggered simply because a contract brought the injured party and the insured together.”
  • The Insured would reasonably expect the Insurer to defend against a stand-alone tort claim regardless of any contractual relationship between plaintiff and the Insured. Plaintiff’s negligence claim arose from the common law duty to construct a home as a reasonable builder would, both tort and contract claims may exist when an insured negligently constructs a home, and tort duties may arise independently of contractual duties.
  • The Contractual Liability Exclusion did not apply because the complaint sought damages for property damage caused by negligent excavation.  Thus, the Insurer owed the Insured a duty to defend.

The Arizona Court of Appeals affirmed the trial court’s ruling that the Policy’s Business Pursuits Exclusion did not bar coverage, but the Insured did not appeal that determination, and the Arizona Supreme Court did not address the Business Pursuits Exclusion.

Read the entire Teuful decision here.  

This and other posts can be found at our blawg: Arizona Bad Faith Blawg.


About the Author: Alden Thomas is an insurance law attorney.  She assists clients with insurance coverage issues, bad faith litigation and construction defect matters.  Alden has represented insurance carriers and their insureds in civil actions in both courts and mediations.  Before beginning private practice, Alden completed a year-long clerkship with Arizona Court of Appeals Judge Patricia Orozco.