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Teufel v. Am. Family Ins. Co. - 6/25/2018

Arizona Supreme Court holds that stand-alone tort claims are not excluded by an insurance policy’s contractual liability exclusion even if a contractual relationship exists between the parties.


A real estate investor hired a home builder to construct a home for him in Paradise Valley (the “PV Home”), and he purchased a homeowner’s insurance policy from American Family during construction.  After construction was completed, he sold the PV Home and purchased a new home in Scottsdale (the “Scottsdale Home”).  He also purchased a homeowner’s policy from American Family for the Scottsdale Home. 

Subsequently, the PV Home was damaged by rock slides that were caused by improper excavation during construction.  The buyer of the PV Home sued the investor alleging contract, negligence, and fraud claims.  The investor tendered the claims to American Family, which denied coverage, and the investor sued.  The superior court granted summary judgment for American Family, concluding that there was no coverage under either the PV Home policy, because the rock slides occurred outside the policy period, or the Scottsdale Home policy, because of the policy’s “contractual liability” exclusion.  The investor appealed, and the Court of Appeals affirmed as to the PV Home policy but reversed as to the Scottsdale Home policy.  American Family then appealed.

The Supreme Court affirmed the Court of Appeals’ conclusion as to the Scottsdale Home policy.  The Court found that the language of the policy’s contractual liability exclusion made clear that the exclusion applied to “personal liability required by or originating from a contract,” and did not apply to tort claims.  To conclude otherwise, the Court reasoned, would conflict with the investor’s reasonable expectations because nothing in the policy’s language suggested that the contractual liability exclusion would apply to stand-alone tort claims. 

American Family also argued that the buyer’s negligence claim arose out of the purchase contact and was therefore excluded.  The Court disagreed, confirming that home “builder-vendors” have a “common law duty of care that is independent of a contractual duty.”  The Court also disregarded American Family’s arguments about the validity of the buyer’s negligence claim, reasoning that such issues did not impact American Family’s duty to defend the investor. 

Justice Timmer authored the unanimous opinion of the Court.

Posted by: Nathan Arrowsmith

Posted On: 7/6/2018