“Subcontractor Exception” Does Not Create More Coverage for Additional Insured

Double AA Builders v. Preferred Contractors Ins. Co. – “Subcontractor Exception” Does Not Create More Coverage for Additional Insured

The Arizona Court of Appeals recently confirmed that the “subcontractor exception” of the “your work” exclusion cannot create coverage for an additional insured, particularly when the same provision would bar coverage for the named insured.  

The “your work” exclusion, standard in a commercial general liability policy, typically bars coverage when the only damage is to the insured’s own “work.”  Courts have uniformly recognized that this type of policy is not meant to act as a warranty of the insured’s own work.  This exclusion typically includes an exception, however, if the damage arises out of work “performed on your behalf by a subcontractor.”  In Double AA Builders v. Preferred Contractors Ins. Co., 241 Ariz. 304, 386 P.2d 1277 (Ariz. App. 2016), the Arizona Court of Appeals addressed, for the first time, whether this exception could create coverage when an additional insured, as opposed to a named insured, is seeking coverage.  

Double AA Builders was the general contractor for the construction of a Harkins Theatre.  It hired Anchor Roofing to install the roof.  After the roof leaked and caused damage to the theater, Double AA replaced it and sought indemnity from Anchor as well as its insurer, Preferred Contractors (whose policy named it as an additional insured).  Notably, Double AA sought to recover only the cost of replacing the roof.  The trial court found that there was an “occurrence” that had resulted in “property damage” during the policy period and that the “subcontractor exception” negated the “your work” exclusion since the work was performed by Double AA’s sub, Anchor Roofing.  On appeal, however, the Court held the exception did not apply.  Simply put, the “your work” exclusion applies to work performed by the named insured.  “You” and “your” are defined to include the named insured and anyone qualifying as a named insured under the policy.  Anchor Roofing, the named insured, performed the work.  All damage was to the named insured’s work.  The subcontractor exception, explained the Court, would only apply if Anchor had used subs to perform this work.  Double AA Builders was simply an additional insured.  It could not argue that this exception applied because the work was performed by one of its subs.  Otherwise, explained the Court, the additional insured would be able to “take advantage of” the subcontractor exception and obtain greater coverage than would be available for the named insured, and interpretation that would “neither be rational nor consistent with the express language of the policy”.  This is particularly true since coverage for an additional insured, by nature, is intended to be more limited than that of a named insured and, in many cases, is provided with little or no additional premium.

Notably, in Double AA Builders, the additional insured sought coverage only for the cost of replacing the roof itself.  In other words, the “your work” exclusion applied in the first place because all damage sought was to the named insured’s own work.  This holding does not necessarily impact coverage in other situations, where the work has caused damage to other property and claims are made for that other damage.   Further, although the leaking roof had apparently caused additional damage, no claim was made for that additional damage.  The trial court still had found an “occurrence” causing “property damage” before addressing the applicability of the exclusion and its exception.  Because the Court of Appeals found the “your work” exclusion clearly applied, and the exception did not apply, it did not further address whether the trial court had correctly found an “occurrence” in the first place.  

Because this case was limited to a situation involving the replacement of faulty work only, it may not have a broad impact on coverage in general.  It merely reinforces the general rule that liability policies do not cover the repair of faulty work.  However, the Court of Appeals’ decision does confirm the notion that an additional insured is not entitled to any greater coverage under a policy than a named insured, a notion advanced by most insurers although perhaps never expressly articulated by the Courts.  This general principle may ultimately assist carriers in making similar arguments in other types of situations involving additional insureds and the scope of coverage available under a general liability policy.

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Contact Jennifer Bahling or Kevin Barrett for more information.