A Homeowner’s Insurer Has a Duty to Defend a Builder Vendor Against a Claim for Negligent Excavation Brought by the Homebuyer
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.
Teufel changed his mind and sold the PV property to Cetotor Inc. Teufel’s homeowner’s policy terminated.
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.