Arizona “legally obligated to pay,” breach of contract as an “occurrence,” contractual liability exclusion, exclusion j.(5) “that particular part,” “get to” costs, and voluntary payment condition.

In Desert Mountain Properties Ltd. Partnership v. Liberty Mutual Fire Ins. Co., 236 P.3d 421 (Ariz. Ct. App. 2010), aff’d, 250 P.3d 196 (Ariz. 2011), insured Desert Mountain was the developer for fifty homes.  Following completion, several of the homes experienced settlement, cracking, and drainage problems.  Desert Mountain determined that the damage was being caused by improper soil compaction.  After notifying its CGL insurer, Liberty Mutual, of the problems, Desert Mountain repaired all of the homes and then sought reimbursement from Liberty Mutual.  After Liberty Mutual denied coverage, Desert Mountain sued Liberty Mutual for breach of contract.   The trial court first entered partial summary judgment for Liberty Mutual, ruling that, while Desert Mountain could recover the costs to repair the damage to the homes caused by the improperly compacted soil, it could not recover the costs to repair the improperly compacted soil.  The case then proceeded to trial and, following a jury verdict in favor of Desert Mountain, Liberty Mutual appealed.  The intermediate appellate court first rejected Liberty Mutual’s argument that, because there was no underlying suit against Desert Mountain, it never became “legally obligated to pay,” holding that “legally obligated to pay as damages” is not limited to a judgment but

means any obligation enforceable by law, including, for example, an obligation created by statute, contract or the common law.  Once created, the obligation exists prior to and even in the absence of a suit to enforce it or a court order compelling performance.

The court notes that, while the duty to defend provision expressly refers to legal proceedings, the duty to pay provision does not.  The court next held that the costs incurred by Desert Mountain to repair the homes constituted “damages.”   The court next rejected Liberty Mutual’s argument that Arizona’s economic loss rule limited the homeowners remedy against Desert Mountain to breach of contract and that a CGL policy only covered tort claims.  The court states:

While there is some appeal to the notion that a breach of contract is not the sort of accidental risk to which liability insurance is designed to apply, we are reluctant to reach such a limitation into a CGL policy when the parties have not chosen to write it for themselves.

The court next held that the contractual liability exclusion does not apply to a breach of contract claim because “assumption of liability in a contract or agreement” is limited to an indemnity claim.  The court next held that Liberty Mutual’s functional equivalent of ISO CGL exclusion l. did not apply because the homes were built by a general contractor rather than Desert Mountain. The court next held that Liberty Mutual’s functional equivalent of ISO CGL exclusion j.(5) did not apply because it applies only to “that particular part” which here is the defectively compacted soil and the trial court had ruled that Desert Mountain could not recover the costs to repair the defective soil.  The court next rejected Liberty Mutual’s “voluntary payment” argument, holding there was sufficient evidence for the jury to conclude that Liberty Mutual was not prejudiced by Desert Mountain’s actions.     The  court next addressed Desert Mountain’s appeal of the trial court’s summary judgment on the costs to repair the defectively compacted soil.  To access some of the soil, Desert Mountain had to damage non-defective parts of the homes and argued that these “get to” costs should not be excluded.  The court rejected this argument.  The Supreme Court of Arizona affirmed the court of appeals’ decision “for the reasons set forth therein.”