Teufel v. American Family (6/14/18)

The court discusses the meaning of an exclusion in a homeowner’s policy. (We’ll condense things a bit, omitting minor issues briefly discussed.) The result may well be correct. But the opinion is not a model of contract analysis.

Plaintiff built a house intending to live in it himself, so the story goes, having it built by a company in which he — a “dabbler” in the real-estate business — was merely an investor. But he decided to sell it instead. When part of the property slid down the side of a mountain the buyer sued him in tort and contract, alleging that he was the builder. By this time Plaintiff had bought another house and an American Family homeowner’s policy on it. He tendered the defense to the carrier, which denied it. He sued.

The policy excludes liability “under any contract or agreement.” Does that mean that it excludes any liability that exists because there was a contract (AmFam’s position, accepted by the trial court, which granted it summary judgment)? Or does it exclude only contractual liability (Plaintiff’s position, accepted by the Court of Appeals, which reversed)?

The Supreme Court decides that both interpretations are reasonable and that (citing Wilson 1989) the policy is therefore ambiguous and must be construed “by examining the transaction as a whole, including the policy language and the insured’s reasonable expectations.” “Transaction as a whole” is of course one of those phrases that means whatever a court wants it to mean in a given case. In this case it apparently means nothing; the analysis deals only with policy language and reasonable expectations.

As to policy language, the exclusion said “under” while most other exclusions in the policy said “arising out of.” Whether their meaning differs, the court tells us, is “unclear.” It cites dictionary definitions of both. “Applying these definitions” (note the plural), the court concludes that the provision does not apply “simply because a contract brought [the parties] together”; instead, it excludes only “liability required by or originating from a contract.” In other words, “regardless of the precise meaning of ‘under,'” Plaintiff is right.

So the court uses definitions of both “under” and “arising out of” to interpret a provision that uses one but not the other. The interpretation of either thus remains unclear. But the court is able to combine them using some obscure dialectic that gives meaning to a word “regardless” of its meaning.

“An insured’s reasonable expectations under this policy also suggest that the . . . exclusion does not apply to [tort] liability.” What, you ask, were those reasonable expectations? How did the policy language (the “unclear” policy language) inspire them? How did they “suggest” the result? The court doesn’t actually say; its reasonable-expectations paragraph isn’t an analysis as much as an announcement of conclusions. It gives the strong impression, in fact, that all it really has in mind is what it specifically says in the next paragraph: if AmFam meant to exclude all liability then it should expressly have said so.

(The carrier then argued that in this situation even the tort claim arose out of the contract. The court disagrees, citing Woodward (1984) for the proposition that “a builder–vendor owes a common law duty of care that is independent of a contractual duty.”)

Since the negligence claim is not excluded the insurer must defend, though which claims it must pay for is a question the court sidesteps.

(Opinion: Teufel v. American Family)