Teufel v. Am. Family Mut. Ins. Co.

• Decision Date: 14 June 2018
• Docket Number: No. CV-17-0190-PR,CV-17-0190-PR
• Citation: 419 P.3d 546
• Parties: Dennis E. TEUFEL, Plaintiff/Appellant/Cross-Appellee, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a foreign Corporation; Kerry V. Hanson, an Arizona resident, Defendants/Appellees/Cross-Appellants.
• Court: Arizona Supreme Court

419 P.3d 546

Dennis E. TEUFEL, Plaintiff/Appellant/Cross-Appellee,

v.AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a foreign Corporation; Kerry V. Hanson, an Arizona resident, Defendants/Appellees/Cross-Appellants.

No. CV-17-0190-PR

Supreme Court of Arizona.

Filed June 14, 2018

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

JUSTICE TIMMER authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE BRUTINEL, and JUSTICES PELANDER, BOLICK, GOULD, and LOPEZ joined.

JUSTICE TIMMER, opinion of the Court:

¶1 Homeowner’s policies that insure against personal liability generally require the insurer to defend the insured against claims that fall within the policy’s coverage. We here decide whether a policy exclusion for personal liability "under any contract or agreement" relieves an insurer of defending its insured, an alleged builder–vendor, against a claim for negligent excavation brought by the home buyer. We hold that the exclusion does not apply to relieve the insurer of its duty to defend because the negligence claim arises from the common law duty to construct the home as a reasonable builder would.

BACKGROUND

¶2 Dennis Teufel hired Carmel Homes Design Group to build a mountainside home on a vacant lot in Paradise Valley (the "Longlook Property"). He had previously "dabbled in real estate" and "invested money from time to time in a loose partnership [with Carmel Homes Design Group]." Teufel intended to reside at the Longlook Property, and at the start of construction he purchased a homeowner’s policy from American Family Mutual Insurance Company ("American Family"), which insured against personal liability.

¶3 Teufel changed his mind about living at the Longlook Property. Thus, in May 2011, after construction was completed, he sold that property to Cetotor, Inc. ("Cetotor"), and the homeowner’s policy coverage ended. The real estate purchase contract governing this sale is not in the record.

¶4 Teufel purchased a home in Scottsdale (the "82nd Place Property"), moved in, and bought a new homeowner’s policy from American Family. This policy also provided personal liability coverage and obligated American Family to defend Teufel 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." The policy was effective from January 2012 through January 2013.

¶5 Rockslides occurred on the Longlook Property in November 2011 and August 2012, allegedly as the result of improper excavation during construction, which damaged the property. In November 2012, Cetotor sued Teufel, alleging he was a builder–vendor and asserting breach of contract, negligence, and fraud-based claims.

¶6 Teufel tendered defense of Cetotor’s complaint to American Family under the Longlook Property and the 82nd Place Property policies. American Family declined the tender of defense on the grounds there was no coverage under either policy.

¶7 Teufel sued American Family and its agent, seeking damages and declaratory relief. The superior court granted summary judgment in favor of American Family. The court found that Cetotor’s property damage occurred outside the Longlook Property policy period so no "occurrence" triggered coverage under that policy. Although the court found that the property damage from the August 2012 rockslide was an "occurrence" during the 82nd Place Property policy period, and the policy’s "business pursuits" exclusion did not apply, it ruled there was no coverage per the policy’s "contractual liability" exclusion. As a result, American Family had no duty to defend.

¶8 The court of appeals affirmed the summary judgment with respect to the Longlook Property policy but reversed with respect to the 82nd Place Property policy. Teufel v. Am. Family Mut. Ins ., 1 CA-CV 15-0736, 2017 WL 1882330, at *1 ¶ 1 (Ariz. App. May 9, 2017) (mem. decision). The court of appeals disagreed with the superior court that the contractual liability exclusion applied. Id . at *3 ¶ 13. (The court also rejected American Family’s cross-appeal argument that the 82nd Place Property policy’s "business pursuits" exclusion applied. Id . at *4 ¶ 18. Because American Family did not seek review of that decision, we do not address it.)

¶9 We granted review to decide the applicability of the contractual liability exclusion in the 82nd Place Property policy. We have jurisdiction pursuant to article 6, section 5(3), of the Arizona Constitution and A.R.S. § 12-120.24.

DISCUSSION

I. Principles of review

¶10 We review a grant of summary judgment de novo. SolarCity Corp. v. Ariz. Dep’t of Rev. , 243 Ariz. 477, 480 ¶ 8, 413 P.3d 678, 681 (2018). Likewise, we review de novo the meaning of insurance policies. See Sparks v. Republic Nat’l. Life Ins. , 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982). We accord words used in policies their plain and ordinary meaning, examining the policy "from the viewpoint of an individual untrained in law or business." Desert Mountain Props. Ltd. v. Liberty Mut. Fire Ins. , 225 Ariz. 194, 200 ¶ 14, 236 P.3d 421, 427 (App. 2010), aff’d , 226 Ariz. 419, 250 P.3d 196 (2011). If a policy is subject to "conflicting reasonable interpretations," it is ambiguous, State Farm Mut. Auto. Ins. v. Wilson , 162 Ariz. 251, 258, 782 P.2d 727, 734 (1989), and we interpret it by examining, as pertinent here, the "transaction as a whole," First Am. Title Ins. v. Action Acquisitions, LLC , 218 Ariz. 394, 397 ¶ 8, 187 P.3d 1107, 1110 (2008). If an ambiguity remains, we construe it against the insurer, id. , particularly when the ambiguity involves an exclusionary clause, see Sec. Ins. Co. of Hartford v. Andersen , 158 Ariz. 426, 428, 763 P.2d 246, 248 (1988) ; 2 Couch on Insurance § 22:31 (3d ed.) (stating that exceptions to coverage are "strictly construed against the insurer").

II. Scope of the duty to defend

¶11 A liability insurer’s duty to defend, which is separate from and broader than its duty to indemnify, generally arises if the complaint filed against the insured alleges facts that fall within the policy’s coverage. See Quihuis v. State Farm Mut. Auto. Ins. , 235 Ariz. 536, 544 ¶ 27, 334 P.3d 719, 727 (2014) ; see also Lennar Corp. v. Auto-Owners Ins. , 214 Ariz. 255, 260–61 ¶ 11, 151 P.3d 538, 543–44 (App. 2007) (stating that a duty to defend exists when the third-party suit "alleg[es] facts that, if true, would give rise to coverage, even though there would ultimately be no obligation to indemnify if the facts giving rise to coverage were not established"). The insurer may investigate the matter, however, and refuse to defend based on facts discovered outside the complaint that take the case outside coverage. See Quihuis , 235 Ariz. at 544 ¶ 28, 334 P.3d at 727 ; Kepner v. W. Fire Ins. Co. , 109 Ariz. 329, 331–32, 509 P.2d 222, 224–25 (1973). But 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." United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 117, 741 P.2d 246, 250 (1987) ; see also Quihuis , 235 Ariz. at 544 ¶ 27, 334 P.3d at 727 (citing quoted language from Morris with approval); W. Cas. & Sur. Co. v. Int’l Spas of Ariz., Inc. , 130 Ariz. 76, 79–80, 634 P.2d 3, 6–7 (App. 1981) (finding a duty to defend all claims so long as there is any claim that falls within the policy’s coverage).

III. Application

A. The contractual liability exclusion

¶12 American Family concedes that an "occurrence" of "property damage" happened during the 82nd Place Property policy term, and it must therefore defend Teufel against Cetotor’s complaint unless a policy exclusion applies. Accordingly, the only issue here is whether, as a matter of law, the contractual liability exclusion relieves American Family of the duty to defend.

¶13 The contractual liability exclusion to personal liability coverage in the 82nd Place Property policy provides: "Contractual Liability. We will not cover personal liability under any contract or agreement." The dispute here concerns the meaning of "under any contract or agreement" and whether it includes personal liability based on Cetotor’s negligence claim. The policy does not define "under." And because fifteen other policy exclusions for personal liability use the term "arising out of," it is unclear whether "under" carries a different meaning.

¶14 The superior court saw no meaningful distinction between "under" and "arising out of." It reasoned that using either definition, Teufel’s potential liability to Cetotor for negligence is "necessarily ‘under a contract’ " because liability would not exist "absent the underlying real estate purchase contract." The court of appeals rejected that reasoning, concluding that Cetotor’s negligence claim was "entirely independent" of the contract between Cetotor and Teufel, which only "placed the parties within tortious striking range of one another, but ... was otherwise unrelated to liability." Teufel , 1 CA-CV 15-0736, 2017 WL 1882330, at *3 ¶ 13.

¶15 American Family urges us to adopt the superior court’s interpretation of the contractual liability exclusion. It points out that nothing limits the exclusion’s application to liability based solely on a breach of contract. According to American Family, "under" should be broadly interpreted to mean that the exclusion applies to liability that could not exist "but for" a contract, "irrespective of whether the liability is related to or independent of the contract." It then concludes that Cetotor’s negligence claim falls within the exclusion...