A general liability policy’s “impaired property” exclusion relieved an insurer of any duty to defend an insured against a suit alleging that the insured had negligently installed electrical equipment which caused a loss of use of the claimant’s property. (All Green Electric, Inc. v. Security National Insurance Co. (2018) 22 Cal.App.5th 407)
Facts
J. Bruce Jacobs, M.D., hired All Green Electric, Inc. to perform electrical work as part of the construction of an MRI and X-ray facility. All Green’s work including running power and outlets to a room in which a mammography machine was to be installed. After the mammography machine was installed, the machine would not function properly due to a magnetic field in the room. The machine was moved to a second room, but the problem continued. Dr. Jacobs next hired a contractor to install steel shielding in the second room, but the problem persisted. Ultimately, Dr. Jacobs hired an electromagnetic field expert who determined that the magnetic field was caused by a loose bolt in an electrical cabinet installed by All Green. When the bolt was tightened, the magnetic field instantly disappeared.
Dr. Jacobs sued All Green, alleging that All Green had negligently failed to tighten one of the bolts in the electrical cabinet installed by All Green, and that such negligence resulted in a magnetic field that interfered with the operation of the mammography machine. Dr. Jacobs sought damages for unnecessary modifications and repairs, harm to Dr. Jacobs’ reputation, loss of business, and loss of profits.
All Green tendered defense of the lawsuit to its insurer, State National Insurance Company (SNIC), which had issued commercial general liability policies covering All Green for damages because of property damage caused by an occurrence and not subject to any exclusion. SNIC denied All Green’s tender based on the “impaired property” exclusion in All Green’s policies. That exclusion barred coverage for 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.” The SNIC policies defined “impaired property” 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.”
Holding
The California Court of Appeal affirmed the summary judgment in favor of SNIC.
The appellate court held that Dr. Jacobs’ claims against All Green in the underlying lawsuit fell within the SNIC policies ‘ “impaired property” exclusion. In the underlying lawsuit, Dr. Jacobs had alleged that All Green’s failure to tighten a bolt had resulted in loss of use of the mammogram machine. That was property damage (loss of use) to impaired property (the mammogram machine) that could not be used because of an alleged deficiency in All Green’s work (the loose bolt), and the impaired property could be restored by adjusting All Green’s work (tightening the bolt). Thus, the “impaired property” exclusion applied.
The appellate court acknowledged that the impaired property exclusion contained an exception stating 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.” However, there were no allegations or extrinsic facts suggesting that All Green or anyone else had somehow caused physical injury to the electrical cabinet after All Green’s work was complete. Thus, the exclusion’s exception was inapplicable.
Comment
The insured, All Green, argued that it had properly tightened the bolt and that it therefore had no liability to Dr. Jacobs in the underlying action. However, the appellate court held that All Green’s mere denial of liability in the underlying action did not create a “potential” for coverage. The court reasoned that if All Green was not negligent, then All Green had no liability at all, and SNIC would have no duty to indemnify under the policy. Conversely, if All Green was negligent, then All Green’s liability would be excluded form coverage by the “impaired property” exclusion, and SNIC would likewise have no duty to indemnify under the policy. Because in either scenario there was no “potential” for indemnity, there was no duty to defend.