Impaired Property Exclusion Bars Coverage When Loose Bolt Interferes with MRI Unit Operation

In All Green Electric v. Security National Ins. Co. (No. B279456, filed 3/19/18, ord. pub. 4/17/18), a California appeals court ruled that the impaired property exclusion barred coverage for a claim based on the insured’s failure to tighten a loose bolt that resulted in stray magnetic fields interfering with operation of an MRI machine and allegedly threatening the health of personnel.

All Green was an electrical contractor hired to perform wiring for an MRI unit installation. Stray magnetic fields interfered with the unit’s operation. Efforts to remediate the problem included installing shielding and ultimately relocating the unit to another room. An expert finally determined that a bolt left loose by All Green was causing the magnetic field, which disappeared when the bolt was properly tightened. The facility sought damages for negligence, including costs for unnecessary modifications and repairs, payments to outside sources for substitute mammography testing, operational costs and expenses, damage to reputation, lost profits, and the loss of an HMO contract.

Security National denied coverage based on the policy’s impaired property exclusion – “Damage To Impaired Property Or Property Not Physically Injured,” which states that coverage does not apply to “‘Property damage’ to ‘impaired property’ or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in ‘your product’ or ‘your work;’ or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.”

An exception stated that “[t]his exclusion does not apply to the loss of use of other property arising out of the sudden and accidental physical injury to ‘your product’ or ‘your work’ after it has been put to its intended use.”

“Impaired property” was defined as “tangible property, other than ‘your product’ or ‘your work,’ that cannot be used or is less useful because: a. it incorporates ‘your product’ or ‘your work’ that is known or thought to be defective, deficient, inadequate or dangerous; or b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by the repair, replacement, adjustment or removal of ‘your product’ or ‘your work’ or your fulfilling the terms of the contract or agreement.” “Your work” was defined as “[w]ork or operations performed by you or on your behalf” as well as “[m]aterials, parts or equipment furnished in connection with such work or operations.”

Coverage was denied on the ground that the MRI unit was “impaired property” in that it “could not be used because All Green failed to fulfill the terms of its contract (by tightening the bolt and/or meeting the standard of care),” but could be “restored to use by simply tightening the bolt, i.e., by ‘adjustment’ of All Green’s work.” Alternatively, Security General asserted the MRI unit was “property that was not physically injured” and the exclusion applied because “[t]he failure to tighten the bolt was a ‘defect, deficiency, inadequacy . . . in . . . ‘your work.’” Finally, Security General argued the exception for “sudden and accidental physical injury” did not apply because there had been no physical injury, and the fact that the bolt was loose was not sudden or a result of an event that occurred after it was “put to its intended use.”

The trial court agreed and granted summary judgment, and the appeals court affirmed. The appeals court rejected All Green’s claim there was a duty to defend because there might have been some cause other than its own negligence. The court pointed out that if All Green was negligent, the exclusion would apply, and if All Green was not negligent, it would have no liability or damages whatsoever: “Because SNIC would have no obligation to indemnify regardless of whether All Green was negligent, either because there was no liability or because the liability fell under the impaired property exclusion, SNIC had no duty to defend. (Citing State Farm v. Drasin (1984) 152 Cal.App.3d 864.)

The All Green court went on to reject a sudden and accidental theory, saying it was too tenuous and farfetched to argue that that damage somehow occurred after All Green’s work was put to use. And the court confirmed that without coverage or a breach of contract, there was no bad faith.

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April 18, 2018