New Evaluation of Important Exposure and Coverage Considerations

The Arizona Supreme Court recently held that the prevailing party in an implied warranty action may seek an award of attorney fees under A.R.S. § 12-341.01, overturning prior decisions by the Arizona Court of Appeals.  Sirrah Ents. v. Wunderlich, 771 Ariz. Adv. Rep. 14, — P.3d — ( Aug. 9, 2017).  Before this decision, parties that did not have privity of contract and express contractual provisions regarding workmanship and the recovery of attorney fees could not seek an award of attorney fees for claims alleging only poor workmanship, rather than the breach of specific contractual provisions (i.e., breach of the implied warranties of workmanship and habitability).  See Sullivan v. Pulte Home Corp., 231 Ariz. 53, 62 ¶ 48 (App. 2012); N. Peak Constr., LLC v. Architecture Plus, Ltd., 227 Ariz. 165, 167 ¶ 7, 170 ¶ 26 (App. 2011).

The courts in Sullivan and North Peak equated implied warranty claims to claims of professional malpractice, addressed in Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519 (1987).  In Barmat, the Arizona Supreme Court held that legal malpractice claims are claims of a breach of a duty implied by law, not a breach of any express contractual duty.  Consequently, an award of attorney fees under A.R.S. § 12-341.01—authorizing such an award to the prevailing party in an action “arising out of contract”—was inappropriate.  The courts in Sullivan and North Peak reasoned that the implied warranty was similarly implied in law, and was essentially the breach of a legal duty (tort claim) rather than an action “arising out of contract”.  The Supreme Court disagreed, holding that the implied warranties are incorporated into every contract for construction, and have the effect of a written contractual guarantee.  Sirrah, 771 Ariz. Adv. Rep. at 16 ¶ 20.

Those in the construction industry should be aware that this holding results in increased exposure for claims where there may not be an express contract between the parties, but the law allows a claim of breach of the implied warranty.  See Woodward v. Chirco Construction Co., Inc., 141 Ariz. 514 (1984) (implied warranty claim allowed by subsequent purchasers).  Because privity is required to bring a claim of implied warranty under certain circumstances, it is important to evaluate the nature of the claims presented, and determine whether such claims can be resolved on motion to dismiss to reduce potential exposure.  (See Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364, 367-68 ¶¶ 11-12 (App. 2013) (breach of implied warranty claim not allowed directly against subcontractor due to lack of privity).

Coverage issues may also arise under an insurance policy’s “supplementary payment” provisions.  Arizona law is unsettled on whether an award of attorney fees may be considered “costs” under these provisions, and whether such an award may be apportioned between covered and uncovered claims.  Cf. Liberty Mut. Ins. Co. v. Blatt, 357 Fed. Appx. 776 (9th Cir. (Cal.) 2009); State Farm  Gen. Ins. Co. v. Mintarsih, 175 Cal. App. 4th 274 (2009) (insurer had no duty to pay award of attorney fees related to uncovered claims).

Overall, it is important to ensure that your counsel is familiar with all the exposure and coverage issues raised by this recent decision.