A Homeowner's Insurer Has a Duty
to Defend a Builder Vendor Against a Claim for Negligent Excavation Brought by
For contractors, the significance of this case is
the reaffirmance of an Arizona builder's common law duty to construct a home as
a reasonable builder would.
A property owner named Teufel hired Carmel Homes Design
Group to build a mountainside home on a vacant lot in Paradise Valley (the "PV
property"). Teufel intended to live on the PV property at the start of
construction and purchased a homeowner's policy from American Family that
insured Teufel against personal liability.
his mind and sold the PV property to Cetotor Inc. Teufel's homeowner's policy
Teufel subsequently purchased a home in
Scottsdale, moved in, and purchased a new homeowner's policy from American
Family that provided personal liability coverage against claims seeking
"compensatory damages for which any insured is legally liable" because of
"bodily injury or property damage caused by an occurrence." The policy defined
"occurrence" as "an accident ... which results during the policy period, in ...
bodily injury ... or ... property damage."
Back on the PV
property, rockslides occurred, allegedly as a result of improper excavation
during construction that damaged the property. Cetotor sued Teufel, alleging he
was a builder-vendor and asserting breach of contract, negligence and
fraud-based claims. Teufel tendered defense of Cetotor's complaint to American
Family, which denied coverage.
In this case, Teufel v.
American Family, the Arizona Supreme Court noted a liability insurer's duty
to defend, which is separate from and broader than its duty to indemnify that
generally arises if the complaint filed against the insured alleges facts that
fall within the policy's coverage. Noting also that if any claims fall within
policy coverage, the insurer must defend against all claims, including "claims
potentially not covered and those that are groundless, false or fraudulent."
The Court ultimately determined that an insured's reasonable expectations under
the policy suggests a "contractual liability exclusion" does not apply to
liability based on a stand-alone tort claim that is viable apart from any
contract between the insured party and the insured (in this case the real estate
sales contract between Teufel and Cetotor). The Court went on to analyze the
stand-alone negligent construction claim, stating that prior Arizona cases have
acknowledged that a builder has a "common law duty of care" and concluded that
both tort and contract claims can exist when a home is negligently constructed.
The Court cited rulings in Woodward v. Chirco Construction Co., 141
Arizona 514 (180 1984) and the recent
Sirrah Enters., LLC v.
Wunderlich, 242 Arizona 542 (1017). In the latter case, the Court ruled
that "negligent construction of a residence can simultaneously support contract
damages for breach of the [implied warranty of workmanlike performance and
ability] and tort damages for any personal injury or damage personal property
caused by the contractor's negligence."
The Court went on
to conclude that Cetotor's negligence claim rests on a builder's common law duty
to construct a home as a reasonable builder would. That claim does not seek
contractual damages for defects in the excavation, but instead seeks
compensation for property damage caused by the negligent excavation. Any
personal liability opposed upon Teufel would not be required by or originate
from the real estate contract with Cetotor. As a result, the Court found that
the contractual liability exclusion did not relieve American Family of its duty
to defend Teufel against Cetotor's negligence claim.
Impact on Contractors
For contractors, the significance of this case is not
the inability of the insurance carrier to use the contractual liability
exclusion to avoid coverage, but rather the reaffirmance of an Arizona builder's
common law duty to construct a home as a reasonable builder would.