No Exclusion for You: Arizona Supreme Court Holds that Contractual Liability Exclusion in Homeowner’s Policy did not Relieve Insurer of its Duty to Defend Builder-Vendor

This summer, the Arizona Supreme Court rendered an opinion in Teufel v. American Family Ins. Co., et al., 244 Ariz. 383 (2018) that addresses interesting issues relating to insurance and the nature of the legal obligations owed by builder-vendors to home buyers.  Specifically, the Court examined whether a homeowner’s insurance policy exclusion “for personal liability ‘under any contract or agreement’ relieve[d] an insurer of defending its insured, an alleged builder-vendor, against a claim for negligent excavation brought by the home buyer.”  The Court ultimately held “that the exclusion did not apply to relieve the insure of its duty to defend because the negligence claim [arose] from the common law duty to construct the home as a reasonable builder would.”


In Teufel, an individual by the name of Dennis Teufel hired a construction company with which he had a partnership to build a mountainside home in Paradise Valley (the “PV Property”).  Mr. Teufel initially intended to reside in the PV Property and, as a result, purchased a homeowner’s insurance policy from American Family Mutual Insurance Company (“American Family”) at the start of construction.  Among other things, this policy insured against personal liability.

Mr. Teufel changed his mind about living in the PV Property.  After construction was completed, he sold the property to Cetotor, Inc.  (“Cetotor”) and allowed the homeowner’s policy to lapse.  Mr. Teufel then purchased a home in Scottsdale (the “Scottsdale Property”) and obtained a new homeowner’s policy from American Family.  This policy also included personal liability coverage and required defense of “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.”

Within the first fifteen months of Cetotor owning the PV Property, multiple rockslides allegedly caused property damage, including damage to HVAC units, broken bay windows, broken marble flooring, and damage to exterior stucco.  Cetotor alleged that these rockslides were caused by deficient excavation during construction, and sued Mr. Teufel as a builder-vendor.  Cetotor asserted claims for breach of contract, negligence, and fraud.  By its negligence claim, Cetotor argued that “‘[a]s a builder-vendor,’ Teufel ‘negligently performed or negligently supervised the hillside grading and slope cut'” for the PV Property.  Mr. Teufel tendered defense of the lawsuit to American Family under the insurance policies covering the PV Property and the Scottsdale Property.  But American Family declined to defend on the grounds that neither policy provided coverage.  As to the Scottsdale Property policy, American Family relied on the following “contractual liability” exclusion: “‘Contractual Liability. We will not cover personal liability under any contract or agreement.'”

Mr. Teufel then sued American Family for, among other things, a declaration that American Family had a duty to defend under the subject policies.  The trial court granted summary judgment in favor of American Family, finding that: (1) Cetotor’s property damage occurred outside period of time covered by the PV Property policy; and (2) although the property damage was an “occurrence” under the Scottsdale Property policy, the policy’s contractual liability exclusion precluded coverage such that there was no duty to defend.  The court of appeals affirmed the trial court’s decision with respect to the PV Property policy, but reversed as to the Scottsdale Property policy.  The court of appeals held that the contractual liability exclusion did not apply, and the Supreme Court granted review.


The Supreme Court focused on whether the Scottsdale Property policy’s contractual liability exclusion applied to Cetotor’s negligence claim.  More particularly, the Court examined whether Cetotor had asserted a stand-alone negligence claim or simply a claim arising from the contract by which the PV Property was sold.  This, in turn, caused the Court to analyze the broader issue of whether contract and tort claims can simultaneously exist when a home is negligently constructed.

In deciding this issue in the affirmative, the Court relied heavily on its earlier opinions in Woodward v. Chirco Construction Co., 141 Ariz. 514 (1984) and Sirrah Enters., LLC v. Wunderlich, 242 Ariz. 542 (2017).  First, the Court cited Woodward for the propositions that “a builder has a ‘common law duty of care’ and…both tort and contract claims can exist when a home is negligently constructed.”  The Court quoted the following passage from Woodward in articulating this point:

The purchaser of a home can seek to recover in contract for defects in the structure itself as such defects render the home less than the purchaser bargained for. . . . The purchaser can also seek to recover in tort for injuries sustained due to the contractor’s failure to construct the home as a reasonable contractor would. For example, if a fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural defects and sue in tort for damage to personal property or personal injury caused by the collapse. Each claim will stand or fail on its own; a distinct statute of limitation applies to each.

Woodward, 141 Ariz. at 515-16.

Second, the Court cited to Sirrah for purposes of establishing that the above-referenced propositions from Woodward have been recognized as authoritative.  In Sirrah, the Court noted that, “[w]e decided [in Woodward] that negligent construction of a residence can simultaneously support contract damages for breach of the [implied warranty of workmanlike performance and habitability] and tort damages for any personal injury or damaged personal property caused by the contractor’s negligence.”  Sirrah, 242 Ariz. at 545.

As a result of the foregoing, the Court held that Cetotor had alleged a stand-alone negligence claim predicated upon “a builder’s common law duty to construct a home as a reasonable builder would.”  The Court reasoned that this claim was independent of the contract by which the PV Property was sold, because the “claim d[id] not seek contract damages for defects in the excavation but instead s[ought] compensation for property damage caused by negligent excavation.”  On this record, the Court held that the Scottsdale Property policy’s contractual liability exclusion did “not relieve American Family of its duty to defend Teufel against Cetotor’s negligence claim.”

The Court was, however, careful to point out that the merits of Cetotor’s negligence claim were not a consideration in deciding whether American Family was obligated to defend Teufel against the claim.  Accordingly, the Court expressly declined to address whether Teufel was actually a builder-vendor or whether Cetotor’s negligence claim could withstand any other defenses, like the application of the economic loss rule.


The decision in Teufel affirms what the Arizona Supreme Court previously decided in both Woodward and Sirrah—namely, that a home buyer’s recourse against a builder-vendor may not be limited to contractual claims.  Generally speaking, and absent the application of potentially available defenses, defective construction of a home can simultaneously support: (1) contract damages for, among other things, breach of the implied warranties of workmanship and habitability; and (2)tort damages for personal injuries or damaged personal property caused by a contractor’s negligence.