Arizona attorneys fees as damages because of property damage, and contractual liability exclusion

In American Family Mut. Ins. Co. v. Spectre West Builders Corp., No. CV09-968-PHX-JAT (D. Ariz. Feb. 4, 2011), arbitration proceedings were instituted against insured general contractor Spectre by the homeowners association for a condominium project constructed by Spectre, seeking damages for the repair of common element construction defects and resulting property damage.   Spectre’s CGL insurer American Family defended under a reservation of right.   The arbitration resulted in an award against Spectre for damages for the repair of the construction defects and resulting property damage, as well as the association’s attorneys fees and costs pursuant to the condominium documents and state statute.  American Family filed suit seeking a declaratory judgment on its duty to indemnify.   After ruling that at least some of the arbitration award was for damages because of property damage caused by an occurrence, the federal district trial court, applying Arizona law, held that the attorneys fees and costs constituted “damages because of property damage.”  The court next rejected American Family’s argument that the attorneys fees and costs fell within the contractual liability exclusion on the basis that they were awarded pursuant to statute rather than contract, the exclusion only applied to assumed liability such as contractual indemnity, and while the exclusion applied to property damage, it did not apply to damages because of property damage.