Arizona Court of Appeals Division One Holds “Arising Out Of” Language in Insurance Agreement Requires Only any Causal Nexus, Not Proximate Cause and That Mutually Repugnant “Other Insurance” Clauses Nullify Each Other Triggering a Coverage Obligation by Both Insurers.

Regal Homes, Inc., a builder, and developer of single-family homes, was insured by Auto-Owners Insurance Co. for 1995 and Zurich Companies for 1996-1998. Sub-contractor GMS Concrete, Inc. was insured by CNA Insurance, who also included Regal Homes as an “additional insured” under their policy.

Eight homeowners sued Regal Homes for manufacturing defects in their homes. Auto-Owners and Zurich participated in the defense and settlement of the litigation, but CNA refused. Regal Homes and Auto-Owners Insurance sued CNA for reimbursement of defense costs and indemnity payments. The trial court granted summary judgment in favor of CNA, and Regal Homes and Auto-Owners appealed.

On appeal, the Arizona Appeals Court affirmed in part, reversed in part, and remanded the case for further consideration. CNA argued it was not required to participate in the defense because a previous court had already adjudicated the issue and determined that GMS Concrete was not at fault for the manufacturing defects. The Court noted that the language of the insurance policy triggered coverage for liability “arising out of” GMS’s work. The Court interpreted the words “arising out of” as “broad, general, and comprehensive terms affecting broad coverage.” Therefore, even if GMS was not the proximate cause of the manufacturing defects, the liability may still have arisen from GMS’s work, and therefore the Court remanded this issue for further consideration.

CNA also argued that it was only required to provide excess coverage to Regal Homes, not primary coverage. The Court stated that when two otherwise applicable insurance policies contain mutually repugnant “other insurance” clauses, a court must disregard both clauses. “Other insurance” clauses are clauses that limit or eliminate coverage under the policy if the insured has other insurance available. Here, the Court held that CNA and Auto-Owners did not have mutually repugnant clauses, therefore, CNA was only required to provide excess coverage. However, the Court found that CNA and Zurich did have mutually repugnant clauses because both policies said their coverage was only “excess” if the insured had other insurance available. Therefore, CNA and Zurich were co-primary insurers for Regal Homes, and both were required to defend Regal against liability. The Court remanded the case to determine how to allocate the costs of defending the action among the three insurance carriers. Regarding Regal Homes, the Court affirmed their summary judgment, holding that their right to reimbursement was too speculative considering they voluntarily used their own money to settle their case even though their insurance carriers did not exhaust their coverage.

Finally, appellants argued that CNA’s refusal to participate in the defense was an act of bad faith. The Court stated that “bad faith” requires that there is no reasonable basis for denying coverage under the policy. Here, the Court found CNA did not act unreasonably by refusing to defend Regal Homes because it was relying on its “excess” insurance clause, and although CNA’s position was ultimately incorrect, it was not unreasonable.

Chief Judge Gemmill authored the decision; Judge Kessler and Judge Orozco concurred.