                                IN THE


   SUPREME COURT OF THE STATE OF ARIZONA

                           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
                         Filed June 14, 2018

          Appeal from the Superior Court in Maricopa County
               The Honorable Karen A. Mullins, Judge
                         No. CV2014-005493
                   REVERSED AND REMANDED

            Memorandum Decision of the Court of Appeals
                         Division One
                       1 CA-CV 15-0736
                       Filed May 9, 2017
                     AFFIRMED IN PART

COUNSEL:

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
               TEUFEL V. AMERICAN FAMILY/HANSON
                         Opinion of the Court


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

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               TEUFEL V. AMERICAN FAMILY/HANSON
                         Opinion of the Court


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.




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                TEUFEL V. AMERICAN FAMILY/HANSON
                          Opinion of the Court



                                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, 450 ¶ 8 (2018). Likewise, we review
de novo the meaning of insurance policies. See Sparks v. Republic Nat’l. Life
Ins., 132 Ariz. 529, 534 (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 (App. 2010), aff’d, 226 Ariz. 419
(2011). If a policy is subject to “conflicting reasonable interpretations,” it is
ambiguous, State Farm Mut. Auto. Ins. v. Wilson, 162 Ariz. 251, 258 (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
(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 (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 (2014); see
also Lennar Corp. v. Auto-Owners Ins., 214 Ariz. 255, 260–61 ¶ 11 (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; Kepner v.
W. Fire Ins. Co., 109 Ariz. 329, 331–32 (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 (1987);
see also Quihuis, 235 Ariz. at 544 ¶ 27 (citing quoted language from Morris
with approval); W. Cas. & Sur. Co. v. Int’l Spas of Ariz., Inc., 130 Ariz. 76, 79–


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                TEUFEL V. AMERICAN FAMILY/HANSON
                          Opinion of the Court


80 (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 because “without entering into


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               TEUFEL V. AMERICAN FAMILY/HANSON
                         Opinion of the Court


the real estate contract with Teufel, Cetotor would not have been exposed
to the effects of the alleged defective excavation.”

¶16           Teufel, unsurprisingly, favors the court of appeals’
construction. He argues that because the exclusion does not mention tort
liability, “under” should be construed narrowly as referring to liability
governed solely by a contract. He concludes that the exclusion “eliminates
coverage for contractual liability and only contractual liability” and does
not apply to tort liability.

¶17            The parties’ conflicting interpretations are each reasonable,
and the exclusion is therefore ambiguous. See Wilson, 162 Ariz. at 258. We
resolve the ambiguity by examining the transaction as a whole, including
the policy language and the insured’s reasonable expectations. See Action
Acquisitions, LLC, 218 Ariz. at 397 ¶ 8; Wilson, 162 Ariz. at 258.

¶18           We start with the policy’s language. Whether or not “under”
and “arising out of” carry different meanings, neither supports the “but
for” construction. Webster’s defines “under” in the contractual context as
“required by,” “in accordance with,” and “bound by.” Under, Webster’s
Third New International Dictionary 2487 (2002). “Arise” means “to
originate from a specified source” or “to come into being.” Arise, id. at 1117.
Applying these definitions, the contractual liability exclusion applies to
personal liability required by or originating from a contract; it is not
triggered simply because a contract brought the injured party and the
insured together. As American Family acknowledged during oral
argument, the exclusion would not apply, for example, if an insured under
this policy contracted with a business to replace his car’s windshield but
negligently failed to warn the business that a vicious dog was in the car,
resulting in the insured’s personal liability for a bitten worker’s injuries.
The worker’s negligence claim would “stand alone” from the contract.

¶19           An insured’s reasonable expectations under this policy also
suggest that the contractual liability exclusion does not apply to liability
based on a stand-alone tort claim that is viable apart from any contract
between the injured party and the insured. Nothing in the exclusion
suggests such a restriction. Indeed, the exclusion is titled “Contractual
Liability.” Cf. Darner Motor Sales, Inc. v. Universal Underwriters Ins.,
140 Ariz. 383, 389 (1984) (recognizing that “reasonable expectations” are
those “induced by the making of a promise” (quoting 1 Arthur L. Corbin,
Corbin on Contracts § 1, at 2 (1963))). In short, an insured would reasonably


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               TEUFEL V. AMERICAN FAMILY/HANSON
                         Opinion of the Court


expect the insurer to defend against a stand-alone tort claim despite the
existence of a contract with the injured party.

¶20            Finally, even assuming any lingering doubt about the breadth
of the exclusion, we strictly construe it in favor of Teufel as the insured. See
Action Acquisitions, LLC, 218 Ariz. at 397 ¶ 8; Andersen, 158 Ariz. at 428. If
American Family had intended to exclude third-party claims that would
not exist “but for” a contract, as the policy’s drafter it should have expressly
communicated this intention. See Sparks, 132 Ariz. at 535 (“[I]f an insurer
desires to limit its liability under a policy, it should employ language which
clearly and distinctly communicates to the insured the nature of the
limitation.”).

¶21           In sum, regardless of the precise meaning of “under” in the
contractual liability exclusion and whether the exclusion applies solely to
liability based on breach-of-contract claims, issues we need not resolve
here, the exclusion does not absolve American Family of its duty to defend
an insured against stand-alone tort claims. We next decide whether Cetotor
alleges such a claim.

              B. Cetotor’s negligence claim

¶22          In addition to its contract claims, Cetotor alleges in its first
amended complaint that “[a]s a builder-vendor,” Teufel “negligently
performed or negligently supervised the hillside grading and slope cut” for
the Longlook Property. Cetotor alleges resulting property damage,
including “damage to the outside HVAC units, broken bay windows,
broken interior marble flooring, damage to the exterior stucco, [and] costs
to remove rock.”

¶23           American Family contends that Cetotor’s negligence claim is
not a stand-alone claim because the duty underlying that claim was created
solely by the real estate purchase contract. Specifically, American Family
argues that because Cetotor sued Teufel as a builder–vendor, any duty he
owed Cetotor arose at the time the parties executed the contract. And
despite the negligence label used in the complaint, Cetotor’s claim is based
on Teufel’s failure to fulfill its contractual duty to deliver the Longlook
Property free of defects and in a habitable condition. We disagree.

¶24           American Family necessarily, but incorrectly, bases its
argument on the premise that a purchaser is limited to contract remedies
for a builder–vendor’s negligence in constructing a home. This Court in
Woodward v. Chirco Construction Co., 141 Ariz. 514 (1984), declared
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                TEUFEL V. AMERICAN FAMILY/HANSON
                          Opinion of the Court


otherwise. The issue there was whether the limitations period for tort
claims or contract claims applied to a homeowner’s breach-of-implied-
warranty complaint filed against a builder–vendor. Id. at 515–16. In its
discussion, the Court 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:

       [W]e agree with those jurisdictions that have held that injury
       incurred due to negligent construction of a residence may
       give rise to an action for breach of the implied warranty of
       workmanlike performance and habitability and an action for
       breach of the contractor’s common law duty of care. . . . We
       see no reason to preclude a purchaser from claiming damages
       in contract and in tort. 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.

Id. Thus, Woodward recognized that a builder–vendor owes a common law
duty of care that is independent of a contractual duty. See id. at 516
(“Negligence, however, requires that a builder or contractor be held to a
standard of reasonable care in the conduct of its duties to the foreseeable
users of the property.” (quoting Cosmopolitan Homes, Inc. v. Weller, 663 P.2d
1041, 1045 (Colo. 1983))); see also Barmat v. John & Jane Doe Partners, 155 Ariz.
519, 523 (1987) (observing that tort duties “are often owed to all those within
the range of harm or at least to some considerable class of people that can
include parties to a contract” (quoting W. Page Keeton et al., Prosser &
Keeton on the Law of Torts § 92, at 655 (5th ed. 1984))).

¶25          American Family dismisses the above-quoted language in
Woodward as dicta. Even if we accept that characterization, we have since
recognized these statements as authoritative. See Sirrah Enters., LLC v.
Wunderlich, 242 Ariz. 542, 545 ¶ 10 (2017) (“We decided [in Woodward] that
negligent construction of a residence can simultaneously support contract
damages for breach of the [implied warranty of workmanlike performance

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               TEUFEL V. AMERICAN FAMILY/HANSON
                         Opinion of the Court


and habitability] and tort damages for any personal injury or damaged
personal property caused by the contractor’s negligence.”).

¶26           American Family also asserts that Woodward is inapplicable
because Teufel was not the builder, and Cetotor therefore cannot maintain
its negligence action. But this argument addresses the merits of Cetotor’s
negligence claim, which is not a consideration in deciding whether
American Family is required to defend Teufel against the claim. See
Quihuis, 235 Ariz. at 544 ¶ 27; Morris, 154 Ariz. at 117. (Similarly, whether
Cetotor’s negligence claim can withstand other defenses, such as
application of the economic loss doctrine, does not impact whether
American Family is required to defend against the claim and assert those
defenses.)

¶27          American Family cites some decisions of federal district
courts, which ruled that homeowner insurers had no duty to defend
insureds against tort claims for defective construction because the tort
duties were created by real estate purchase contracts. But these cases
conflict with Woodward’s recognition that tort duties can arise
independently of contractual duties, and we therefore reject those
decisions. See Am. Nat’l Prop. & Cas. Co. v. Blocker, 165 F. Supp. 2d 1288,
1299 (S.D. Ala. 2001) (“[W]ithout the residential sales contract, [seller]
would not have had a duty of care towards the [buyers].”); Allstate Ins. v.
Morgan, 806 F. Supp. 1460, 1464 (N.D. Cal. 1992) (“[B]ut for that contract,
there could be no claim for negligence.”); Allstate Ins. v. Hansten, 765
F. Supp. 614, 616 (N.D. Cal. 1991) (“Without the contract, the [sellers]
would have had no duty of care towards the [buyers].”).

¶28           We agree with Teufel and the court of appeals that Cetotor
alleges a stand-alone negligence claim in its amended complaint that is
independent of the real estate purchase contract. See Teufel, 1 CA-CV 15-
0736, 2017 WL 1882330, at *3 ¶ 13. As contemplated by Woodward, 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 contract damages
for defects in the excavation but instead seeks compensation for property
damage caused by the negligent excavation. Any personal liability
imposed on Teufel would not be required by or originate from the contract
with Cetotor.

¶29          In sum, the contractual liability exclusion does not relieve
American Family of its duty to defend Teufel against Cetotor’s negligence
claim. Therefore, American Family must defend Teufel against all claims

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              TEUFEL V. AMERICAN FAMILY/HANSON
                        Opinion of the Court


alleged by Cetotor, see Morris, 154 Ariz. at 117, unless another exclusion
applies or other facts outside this record “take the case outside policy
coverage,” Transamerica Ins. v. Meere, 143 Ariz. 351, 360 (1984).

                            CONCLUSION

¶30            We affirm paragraphs twelve and thirteen of the court of
appeals’ memorandum decision. We reverse the superior court’s summary
judgment concerning American Family’s duty under the 82nd Place
Property policy to defend Teufel against Cetotor’s claims and remand to
that court for further proceedings.




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