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

Amended June 25, 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

2

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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

3

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.
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

4

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, 480 ¶ 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–
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

5

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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

6

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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

7

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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

8

otherwise. The issue there was whether the limitations period for tort

claims or contract claims applied to a homeowner’s breach-of-impliedwarranty 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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

9

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 
TEUFEL V. AMERICAN FAMILY/HANSON

Opinion of the Court

10

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.