Lennar Corp. v. Auto-Owners Insurance Co. – 1/23/2007

January 24, 2007

Arizona Court of Appeals Division One Finds Claims of Damage to Home Caused by Allegedly Faulty Workmanship Sufficiently Allege an “Occurrence” Under Homebuilder’s Insurance Policies, Reverses Summary Judgment for Insurers.

Homeowners sued their home developer for breach of warranty and other claims stemming from damage to their home allegedly caused by negligent construction. The developer tendered defense of the claims to its insurer, and to its subcontractors’ insurers, and presented to the insurers evidence of its consultant’s findings that the damage had been caused by specific subcontractors’ negligence. None of the insurers provided the developer with a defense; two filed a declaratory relief action to determine the duty of any or all of them to defend. The developer answered and counterclaimed for breach of contract and insurance bad faith. The trial court granted summary judgment for the insurers on all claims. The developer appealed.

The Court of Appeals reversed, finding that accidental property damage that occurs as a natural result of faulty workmanship may constitute an “occurrence” under the applicable liability insurance policies, thus obligating the insurers to provide a defense to the developer. The policies define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Court rejected arguments that the deliberate acts of subcontractors could not constitute an “accident” from the relevant perspective—that of the developer insured. It also rejected the subcontractors’ insurers’ argument that the complaint did not sufficiently allege facts regarding the specific subcontractors. Once the insured developer made a factual showing that the suit was one for damages within the policy terms, the insurers had a duty to investigate the facts and to provide a defense if so indicated. Questions of fact precluded sustaining judgment for the insurers on the alternative grounds of the “known loss” rule and relevant policy periods. The Court also reversed summary judgments on the bad faith claim and any awards of attorneys’ fees below.

The Court upheld judgment in favor of one subcontractor’s insurer on the alternative ground that the developer was not an “additional insured” under the insurer’s policy, which obligated the insurer to provide coverage to any corporation to whom the subcontractor had agreed to provide liability insurance. The Court found that the subcontractor had not agreed to provide the developer with liability insurance despite contractual promises to the developer to indemnify it and to obtain insurance. An agreement to obtain insurance is not the same as an agreement to add a general contractor to the policy as an additional insured. The dismissed insurer was awarded attorneys’ fees.

Judge Snow wrote the opinion, which was joined by Presiding Judge Hall and Judge Norris