In Double AA 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 judgment in favor of an Additional Insured General Contractor and found the “subcontractor exception” to the “your work” exclusion did not apply to the Additional Insured. In so holding, the Court of Appeals explicitly held that the Additional Insured General Contractor was not entitled to broader coverage than the Named Insured Subcontractor.
Facts & Procedural History
The Double AA 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. The Subcontractor was insured by Preferred Contractors Insurance Company, LLC (“Subcontractor’s Insurer”), and added the General Contractor to the Policy as an “Additional Insured.”[2]
When the roof started leaking, causing resultant property damage, Harkins asked the General Contractor to replace the roof, and the General Contractor agreed. The General Contractor then filed an indemnification action against various parties, including the Subcontractor and the Subcontractor’s Insurer. Notably, the General Contractor only sought indemnification for the cost of replacing the roof, but not the cost of the resultant property damage.[3]
After settlement and default, the Subcontractor’s Insurer was the only remaining defendant. The Subcontractor’s Insurer and the General Contractor filed cross-motions for summary judgment regarding coverage for the cost of replacing the roof. The trial court granted the General 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 sought indemnity for the Subcontractor’s defective work.[5]
Holding
The Arizona Court of Appeals held that the “subcontractor exception” to the “your work” exclusion did not apply to the Additional Insured General Contractor because the Policy defined the terms “you” and “your” as referring only to the Named Insured.”[6] Additionally, because the “subcontractor exception” did not apply to the Subcontractor (because the General Contractor sought coverage for the Subcontractor’s own defective work), the Additional Insured General Contractor was not entitled to broader coverage than the Named Insured Subcontractor that paid premiums for the Policy.[7]
Rationale
The Court of Appeals explained “the exclusion applies because the case relates only to the Named Insured Subcontractor’s defective work. The exception does not apply because the work was performed by the Named Insured Subcontractor acting as a subcontractor, not by a subcontractor acting on the Named Insured Subcontractor’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.” Because the Additional Insured General Contractor only sought to recover for the cost of repairing the Named Insured Subcontractor’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” as referring to the “Named Insured’s.” Accordingly, the Court of Appeals reasoned the exception only applies if a subcontractor performed the work on behalf of the Named Insured Subcontractor. Because the General Contractor was only an Additional Insured under the Policy, the “subcontractor exception” could not apply to Additional Insured General Contractor.[10]
The Court of Appeals further reasoned that the pertinent Additional Insured endorsements 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 case here. The Court refused to allow the Additional Insured General Contractor broader coverage than the Named Insured Subcontractor because it would “render the ‘your work’ exclusion superfluous while requiring the Subcontractor’s Insurer to 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 by the General Contractor does not “transform an Additional Insured into a Named Insured.”[13]
Analysis
The Court of Appeals’ decision confirms two positions insurers have advanced for some time, but for which no Arizona decision provided a clear and concise citation:
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Insurers are not 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. ”The exception” 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.
