There was no coverage for claimed property damage and loss of income where the insured failed to meet its initial burden of showing that business equipment had sustained “direct physical loss” or that the claimed damage was “accidental.” ( MRI Healthcare Center of Glendale, Inc. v. State Farm General Insurance Company (2010) 2010 WL 3028128)
Facts
MRI Healthcare Center of Glendale, Inc. (MHC) provided magnetic resonance imaging (MRI) scanning services from a leased location. Years before the loss that was the subject of this claim, MHC had renovated and customized the leased building so that MHC could install and operate the MRI machine. Among other things, MHC had cut a hole in the roof of the building in order to bring the MRI machine into the building. MHC also had modified the roof by installing a skylight and copper barrier to keep electrical or radio wave interference out of the MRI room.
State Farm General Insurance Company (State Farm) issued to MHC a business policy that included coverage for business personal property and loss of income.
As a result of some storms, MHC’s landlord was required to repair the roof over the room housing MHC’s MRI machine. Initially, the landlord believed it would be possible to simply install another layer of roofing on top of the existing roofing. Eventually, however, the landlord discovered some rot due to long-term water intrusion, and determined that it would be necessary to remove and replace substantially all the existing roof.
The necessary roof replacement could not be undertaken unless the MRI machine was demagnetized, or “ramped down.” MHC was aware that, if the machine was ramped down, there was a possibility it could not be “ramped up” without extensive and time-consuming repairs.
Once the machine was ramped down, it did in fact fail to ramp back up. MHC contended this failure constituted “damage” to the MRI machine and caused MHC so suffer a loss business of income. Because the chain of events was set in motion by the storms, MHC asserted that the storms were the predominant (“efficient proximate”) cause of the loss; and, because storm damage was covered under the business policy issued to MHC by State Farm, MHC claimed it was entitled to recover both the amount it expended to return the MRI machine to working condition and the income loss sustained while the machine was inoperable.
The policy State Farm issued to MHC provided coverage for “ accidental direct physical loss to business personal property … caused by an insured loss .” The policy also provided coverage for loss of income caused when business operations were suspended due to “a ccidental direct physical loss to property … caused by an insured loss ….”
The exclusions provided, in part, as follows: “We do not insure under any coverage for any loss caused by one or more of the items below: a. conduct, acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body whether intentional, wrongful, negligent or without fault; b. faulty, inadequate, unsound or defective: (1) planning, zoning, development, surveying, siting; (2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; (3) materials used in repair, construction, renovation or remodeling; or (4) maintenance; of part or all of any property (including land, structures or improvements of any kind) on or off the described premises; c. weather conditions. But if accidental direct physical loss results from items 3.a., 3.b. or 3.c., we will pay for that resulting loss unless the resulting loss is itself one of the losses not insured in this Section.
State Farm denied MHC’s claim, and MHC sued. The Court granted State Farm’s motion for summary judgment, and MHC appealed.
Holding
The Court of Appeal held that State Farm’s denial of coverage was correct.
First, the Court held that MHC had not met its burden, as the insured, of demonstrating “direct physical loss” to the MRI machine. The fact that the machine failed to ramp up did not, by itself, demonstrate a physical alteration of the MRI machine.
Second, the Court held that the loss was not “accidental.” The Court concluded that the ramping down of the MRI machine was intentional, and the machine’s subsequent failure to ramp back up was an expected, although unwelcome, result of the ramp down.
Third, the Court rejected MHC’s contention that the storms (a covered risk) were the predominant (or “efficient proximate”) cause of the loss. The Court held that even it the storms could be deemed to be the “trigger” (i.e., the cause the set the loss in motion), the storms were not the predominant cause of the loss. Instead, it ultimately was the ramping down itself that was the sole, and predominating, cause of MHC’s loss. The Court also noted that the evidence established that the roof needed to be replaced not because of the storms, but because of long-term, pre-existing rot damage, which the policy excluded.
Comment
Almost every modern all-risk property policy contains an insuring agreement that requires the existence of “direct physical loss” (or “accidental direct physical loss”). It is the insured’s burden to demonstrate the existence of physical damage, after which the burden shifts to the insurer to show the cause of the damage and that the policy excludes the cause of the damage.
In this particular case, the insured showed that the MRI machine stopped working after it was ramped down, but failed to show that the machine actual had undergone some kind of physical change. Moreover, since the insured was aware, before the machine was ramped down, that it later might not ramp up, any physical damage that might have occurred would not be deemed to be “accidental,” i.e., unexpected.