Arizona Court of Appeals Confirms “Subcontractor Exception” to “Your Work” Exclusion Does Not Apply to Additional Insured General Contractor Seeking Coverage For Defective Work of Named Insured Subcontractor

InDoubleAA Builders, Ltd.v.Preferred Contractors Insurance Company, LLC,— P.3d —-, 2016 WL 7508079, *1(Ariz. Ct. App. Dec. 30, 2016), the Arizona Court of Appeals reversed the trial court’s grant of summary judgmentin favor ofanAdditional InsuredGeneral Contractorand found the“subcontractor exception”to the “your work” exclusiondid not apply to theAdditional Insured. In so holding, the Court of Appeals explicitlyheldthat theAdditional InsuredGeneral Contractorwas not entitled to broader coverage than theNamed InsuredSubcontractor.

Facts & Procedural History

TheDoubleAA case arose from the faulty construction of a roof for a Harkins Theatres’complex.[1]Double AA(“General Contractor”)served as the general contractor for the project and subcontracted with Anchor Roofing, Inc.(“Subcontractor”)to install the roofing system.TheSubcontractorwas insured by Preferred Contractors Insurance Company, LLC(“Subcontractor’s Insurer”), and addedthe General Contractorto the Policy as an “Additional Insured.”[2]

When the roof started leaking, causing resultant property damage, Harkins askedtheGeneral Contractorto replace the roof,andtheGeneral Contractoragreed.TheGeneral Contractorthen filed an indemnification action against various parties, includingtheSubcontractorandtheSubcontractor’s Insurer. Notably,theGeneral Contractoronly sought indemnification for the cost of replacing the roof, but not the cost of the resultant property damage.[3]

After settlement and default,theSubcontractor’s Insurerwas the only remaining defendant.TheSubcontractor’s InsurerandtheGeneral Contractorfiled cross-motions for summary judgment regarding coverage for the cost of replacing the roof. The trial court grantedtheGeneral Contractor’s motion concluding, in relevant part, that the “subcontractor exception”[4]applied to the “your work” exclusion, and, consequently finding coverage because the General Contractor soughtindemnity for the Subcontractor’s defective work.[5]

Holding

The Arizona Court of Appealsheld that the “subcontractor exception” to the “your work” exclusion did not apply tothe Additional Insured General Contractorbecausethe Policy definedthe terms “you” and “your”as referringonlytotheNamed Insured.”[6]Additionally, becausethe“subcontractor exception” did not apply to the Subcontractor (because the General Contractor sought coverage for the Subcontractor’s own defective work),theAdditional InsuredGeneral Contractorwas not entitled to broader coverage than theNamed InsuredSubcontractorthatpaid premiums for the Policy.[7]

Rationale

The Court of Appeals explained“the exclusion applies because the case relates only tothe Named InsuredSubcontractor’s defective work. The exception does not apply because the work was performed bythe Named InsuredSubcontractoracting as a subcontractor, not by a subcontractor acting onthe Named InsuredSubcontractor’s behalf.”[8]

The Court of Appeals reasoned that the purpose of the “your work” exclusion is to “prevent liability policies from insuring against the insured’s own faulty workmanship.” Becausethe Additional InsuredGeneral Contractoronly sought to recover for the cost of repairingtheNamed InsuredSubcontractor’s defective work, the “your work” exclusion bars recovery unless the “subcontractor exception” to the exclusion applies.[9]

The “subcontractor exception”applies if work was “performed on your behalf by a subcontractor.” The Policy defines “you” and “your” asreferring tothe “Named Insured’s.” Accordingly, the Court of Appeals reasoned the exception only applies if a subcontractor performed the workon behalf of the Named InsuredSubcontractor. BecausetheGeneral Contractorwas only an Additional Insured under the Policy, the “subcontractor exception” could not apply toAdditional InsuredGeneral Contractor.[10]

The Court of Appeals further reasoned that the pertinentAdditional Insuredendorsements limit an Additional Insured’s coverage under the Policy.[11]The Court explained that because coverage for Additional Insureds is so limited, often no additional premium is required to add a party as an Additional Insured, and so was the casehere. The Court refused to allowthe Additional InsuredGeneral Contractorbroader coverage than the Named InsuredSubcontractorbecause it would “render the ‘your work’exclusion superfluous while requiringtheSubcontractor’s Insurerto accept greater risk with no compensation in the form of additional premiums.”[12]Lastly, the Court clarified that the “Separation of Insured’s” clause relied upon bytheGeneral Contractordoes not “transform an Additional Insured into a Named Insured.”[13]

Analysis

The Court of Appeals’ decisionconfirms two positions insurers have advanced for some time, but for which no Arizona decision provided a clear and concise citation:

1. Insurersarenot expected to cover additional risks not contemplated and paid for via policy premiums;[14]
2. Additional Insured’s are not entitled to broader coverage than Named Insured’s.[15]

[1] Id. at *1.

[2] Id.

[3] Id.

[4] The policy “exclusion” removes from the scope of coverage ‘property damage’ to your work arising out of it or any part of it and included in the products completed operations hazard. ”Theexception” provides that the exclusion does not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”. Id. at 2.

[5] Id.

[6] Id. at *2.

[7] Id. at *3.

[8] Id. at *2.

[9] Id.

[10] Id.

[11] Id. at *3.

[12] Id.

[13] Id.

[14] Id. at *3.

[15] Id.