Yesterday, the Arizona Supreme Court issued a ruling clarifying the scope of the contractual liability exclusion in a homeowner’s policy.
Teufel hired a contractor to build a home but ultimately decided not to live in it and sold it to Cetotor. After the sale, when rockslides damaged the property, Cetotor sued Teufel for breach of contract, negligent construction and fraud. Teufel tendered his defense to American Family under his homeowner’s policy. American Family denied coverage and declined to defend—asserting, as is relevant here, its contractual liability exclusion.
Teufel sued American Family for damages and sought a declaration of American Family’s duty to defend. The Arizona Supreme Court granted review to decide the applicability of the contractual liability exclusion. Interpreting the exclusion—which reads “[w]e will not cover personal liability under any contract or agreement.”—the Court focused its analysis on the meaning of “under.”
American Family argued that “under” should be broadly interpreted to include all liability that could not exist but-for a contract and that, absent the contract for the sale of the home, Teufel would have no liability. Teufel advocated for a narrower construction of “under” that would limit the exclusion to liability governed solely by contract.
The Court found both interpretations reasonable but noted that “because fifteen other policy exclusions for personal liability use the term ‘arising out of’” as their cause trigger, it was “unclear whether ‘under’ had a different meaning.” Ultimately, deeming the exclusion ambiguous, the Court strictly construed the exclusion in favor of the insured because it was not drafted clearly.
However, after analyzing the language of the exclusion, the Court concluded that it did not need to resolve its “lingering doubts” about the exclusion’s breadth because the Cetotor complaint alleged a “stand-alone” builder-vendor tort claim under Arizona law, not subject to a strict construction of the policy language. American Family was required to defend the complaint that alleged a potentially covered claim.
Teufel v. Am. Family Mut. Ins. Co. , No. CV-17-0190-PR, 2018 WL 2976315 (Ariz. June 14, 2018)
