The Court of Appeals of Arizona, Division One, held Commercial General Liability ("CGL") policies issued by Liberty Mutual covered expenses its insured, Desert Mountain, voluntarily incurred in repairing property damage, even though none of the homeowners had sued Desert Mountain for the damages.
Soil settlement caused cracks and other damage to residential property due to defectively installed water and sewage lines and poor compaction of fill material on which the homes were built. Prompted by homeowners' complaints, the developer, Desert Mountain, made repairs, paying an average of $200,000 per home (for fifty homes) to repair the defects. Desert Mountain made repairs even though the homeowners had not brought suit.
Desert Mountain notified Liberty Mutual it had spent $640,000 in repairs and that more repairs were needed. Liberty Mutual asked for additional information regarding the claim. The next month, Desert Mountain provided Liberty Mutual with some of the requested documents. Desert Mountain made additional repairs while waiting for a response from Liberty Mutual, believing it had an obligation to repair the damages.
Desert Mountain then sued the contractor, concerned the statute of limitations would run as to the party responsible for the defective property. It was not until a year and a half later that Desert Mountain provided Liberty Mutual the remaining requested documents. Liberty Mutual then denied payment to Desert Mountain citing the policies' voluntary payment and known loss provisions.
Desert Mountain sued alleging breach of contract and bad faith. The Superior Court granted Liberty Mutual's motion for summary judgment on the bad faith claim, concluding that denial of coverage cannot be considered unreasonable when the claim's validity is itself "fairly debatable." The breach of contract claim was tried before a jury.
The jury considered three provisions Liberty Mutual argued barred coverage: (1) insuring clause; (2) broad form property damage exclusion; and (3) voluntary payments. The jury found the policies' insuring clause did not bar coverage since Desert Mountain's repair expenses were considered "damages" Liberty Mutual was "legally obligated to pay," even though the homeowners had not filed suit. The broad form property damage exclusion provision barred recovery of repairs made to the property experiencing soil compaction resulting from faulty workmanship, but this exclusion did not apply to repair expenses made to property adjacent to the defective property. The jury found Desert Mountain's expenses were covered, despite the repairs being done voluntarily without legal action, because Desert Mountain's actions did not prejudice Liberty Mutual.
The jury trial resulted in a verdict for Desert Mountain. The court denied Liberty Mutual's motion for judgment as a matter of law or new trial. Liberty Mutual appealed. Desert Mountain cross-appealed the grant of summary judgment on the bad faith claim.
The Court of Appeals affirmed holding the policies covered the expenses Desert Mountain incurred in repairing property damage adjacent to the defective property experiencing soil settlement problems. It also upheld the jury's verdict requiring indemnification for Desert Mountain's expenses, even though none of the homeowners had sued Desert Mountain.
Liberty Mutual argued that, since the homeowners had not brought suit, Desert Mountain was not "legally obligated" to make the repairs. The Court of Appeals rejected the California minority view limiting legal obligations to court ordered payments, explaining that legal obligations do not arise solely from court action, but can also arise from statute, contract, or common law. Accordingly, "coverage for sums an insured becomes 'legally obligated to pay as damages' may be triggered even in the absence" of suit or a court order.
The Court of Appeals rejected Liberty Mutual's argument there was no duty to indemnify. Liberty Mutual argued the duty to indemnify is only as broad as the duty to defend, which itself arises only upon filing of a lawsuit. The Court stated the insuring clause did not expressly refer to a lawsuit: "[w]e will pay those sums that the insured becomes legally obligated to pay as damages." By contrast, the standard CGL insuring clause does require a suit: "We will have the right and duty to defend the insured against any 'suit' seeking . . .damages [covered by the policy]." Thus, the duty to defend in this case did not limit the duty to indemnify damages arising from a lawsuit. The Court found further support for this holding in the plain meaning of "damages" (since the term was not further defined in the policy) the meaning of which is not limited to court-ordered damages.
The Court of Appeals narrowly interpreted the Broad Form Property Damage exclusion holding it only applied to the repair of defective workmanship, not repairs made to damage resulting from the defective workmanship. Thus, this provision did not apply to repairs made to property adjacent to the defective property.
The Court of Appeals also held Desert Mountain's repairs did not violate the voluntary payments clause. This clause protects "the insurer's right to a fair adjudication of the insured's liability and to prevent collusion between the insured and the injured person." Therefore, Liberty Mutual had to argue the voluntary repairs caused prejudice. Although Liberty Mutual argued it was prejudiced since the statute of limitations for an express warranty of habitability claim had run, the Court noted the implied warranty of habitability was still available.
On cross-appeal, the Court of Appeals held there was insufficient evidence for a bad faith claim. Even if Desert Mountain could show Liberty Mutual acted unreasonably and, that it either knew or was conscious of its unreasonable actions, the bad faith action is automatically barred when, as here, "the claim's validity is 'fairly debatable.'"
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This opinion is not final. Though it has been certified for publication, it may be modified by reconsideration, or granted review by the Arizona Supreme Court. Should any of these events, occur, the opinion would be unavailable for use as authority in other cases.
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