[THIS OPINION HAS BEEN AFFIRMED]

A long opinion about general liability insurance, telling you things we rather imagine you never knew.

Desert Mountain developed and sold some houses in Scottsdale. When the buyers complained of soil and other problems, Desert Mountain paid $200,000 per house, on average, to fix them. It then sought to recover the money from Liberty Mutual, its CGL carrier. Liberty Mutual denied the claim. Desert Mountain sued for breach of contract and bad faith.

The trial court granted Liberty Mutual summary judgment on bad faith.  It ruled that Desert Mountain could not recover the cost of repairing poorly-compacted soil, since that wasn’t an “occurrence,” but could recover the cost of repairing damage caused by the poorly-compacted soil. It also ruled that Desert Mountain couldn’t “mark up” the costs incurred, i.e., build in additional amounts to cover its employee’s time. The contract claim went to trial; Desert Mountain won; Liberty Mutual appealed.

The insurance promised to pay sums Desert Mutual was “legally obligated to pay as damages.” Liberty Mutual argued, first, that Desert Mountain hadn’t been legally obligated to the homeowners since they hadn’t sued it. The carrier relied on California law, which is that “legally obligated” means legally obligated by a court. But this opinion disagrees, holding that courts enforce legal obligations but are not needed to create them.  And “damages,” according to the opinion, are monies paid for a loss, not simply amounts awarded by a court. Liberty Mutual didn’t argue that the homeowners’ claims had no merit nor that the amounts Desert Mountain paid were excessive, so Desert Mountain was entitled to recover.

But Liberty Mutual also argued that the damage to the houses was, under the economic-loss rule, recoverable only in a contract action and that insurance policies cover tort, not contract, claims. The court, however, was “reluctant” to hold that a CGL policy can’t cover contract damages because it does not expressly and flatly bar all contract claims. Being “reluctant” to do something is an unforthright way of doing the opposite: “Instead, we hold that the ‘proper inquiry is whether an ‘occurrence’ has caused ‘property damage.’”

An endorsement to the policy denied coverage for damage to property not owned or rented by the insured, “the restoration, repair, or, replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured.” This, the court says, applies to the repair of defective workmanship and not to the repair of damage caused by defective workmanship to non-faulty property. In other words, the houses were perfectly fine, it was only the soil that was faulty, so fixing the soil isn’t covered but fixing the homes is. (We wonder how many homeowners in all those faulty-soil cases consider, and allege, that their houses are just peachy, thanks, its just that pesky soil that’s the problem.)

The policy also said, as all such policies do, that it doesn’t cover payments made voluntarily and without the insurer’s consent. The court held that the provision only applies if the insurer is prejudiced and that a jury could reasonably have concluded that Liberty Mutual wasn’t.

Liberty Mutual argued that Desert Mountain knew of the problems with the houses before it bought the policy. In that case, an exclusion would apply. Desert Mountain’s people testified that its prior knowledge was only of a few, minor problems, not of anything widespread, and that those minor problems had been fixed. Liberty Mutual’s expert apparently agreed. In any event, there was sufficient evidence for a jury to find that Desert Mountain didn’t have prior knowledge.

Liberty Mutual also complained about some jury instructions, about some fact-specific issues, and about the award of attorneys fees, which are of no real importance unless your name is Desert Mountain or Liberty Mutual. We do wonder, though, how it is that the court instructed the jury on what the coverage was, turning a question of fact into a matter of law.

Desert Mountain cross-appealed.

First, it contested the trial court’s ruling that it couldn’t recover the cost of repairing the soil because some of that cost resulted from having to rip up perfectly good walls or floors. The Court of Appeals concluded that this was part of repairing the defect and that the trial court was therefore right in not allowing it.

Next, Desert Mountain contended that Liberty Mutual wasn’t entitled to summary judgment on bad faith. The court, for factual reasons, disagreed.

Finally, Desert Mountain argued about the mark-up damages. But the policy did not specifically allow them. In addition, its mark-up did not reflect the actual value of the employee’s time, so the jury couldn’t have awarded it anyway.

The important part of all this is that liability polices now cover claims never made and that would have been contract claims if they had been made, courtesy of some hair-splitting sophistry of the sort we thought Arizona courts were now trying to discourage.

(link to opinion)