- All Green Electric, Inc. V. Security National Ins. Co. (2nd Dist. Ct. App. 2018) ___ Cal. App. 5th ___, 2018 Daily Journal Djdar 3422, Case No. B279456
- August 3, 2018
Jacobs hired All Green Electric, Inc. to perform electrical work as part of the construction of an MRI and X-ray facility. The work included running power and outlets to a room where a mammography machine was to be installed. When the machine was installed, it malfunctioned due to a magnetic field in the room. The machine had to be moved to a new room, but the problem persisted. Jacobs hired a contractor to install steel shielding in the room but, once again, the problem continued. Jacobs then hired an electromagnetic field expert who determined that the magnetic field was being caused by a loose bolt in an electrical cabinet installed by All Green. Once the bolt was tightened, the problem disappeared.
Jacobs sued All Green alleging negligence in failing to properly install the electrical components, including failing to tighten the bolt. He sought damages for costs of unnecessary modifications and repairs, payments to outside sources for substitute mammography testing, operational costs and expenses, damage to reputation, lost profits, and loss of an HMO contract.
All Green tendered its defense to its general liability insurer, Security National Insurance Company ("SNIC"), and took the position that all the bolts had been properly tightened and that its work had passed two inspections. SNIC denied the tender, citing the impaired property exclusion. This exclusion stated that the policy did 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." The exclusion also had an exception for "'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.'" SNIC's denial stated that the mammography machine was impaired property as it could not be used due to All Green's failure to fulfill its contract (by failing to tighten the bolt) but that the machine could be returned to use by adjusting All Green's work (tightening the bolt). The denial further explained that the exception to the exclusion did not apply as there was no physical damage to property and the fact that the bolt was loose was not sudden or the result of an event that occurred after it was put to its intended use.
All Green filed a complaint against SNIC seeking a declaration that SNIC owed a duty of defense and alleging breach of contract and bad faith. SNIC moved for summary judgment and the trial court granted the motion, finding that the impaired property exclusion applied to preclude coverage. All Green appealed.
APPELLATE COURT'S RULING
All Green contended on appeal that the trial court erred in granting summary judgment because there were other possible reasons that the bolt could have come loose, independent of any conduct by All Green. For example, a truck could have struck the cabinet causing the bolt to loosen, or vandals could have loosened it, or an earthquake could have caused it to become loose. The appellate court disagreed that this created a potential for covered liability. The complaint alleged only that the loss of use of the machine resulted from All Green's failure to tighten the bolt, namely a deficiency in its work. Such liability was not covered by the policy. No theory was proposed by All Green under which it could be subject to liability covered by the policy. Nor was coverage triggered by All Green's contention that it performed the work properly and was not responsible for the loose bolt. As the court noted, "[i]n such a circumstance, All Green would not be liable to Jacobs and there would be nothing to indemnify. Even if All Green is technically correct that its lack of negligence negates the impaired property exclusion, it would not give rise to a duty to defend because the lack of negligence would also negate All Green's liability."
All Green further argued that the exception to the exclusion applied, again setting forth possible scenarios, this time involving situations where the bolt was properly installed, but All Green itself later inadvertently damaged the electrical cabinet and knocked the bolt loose. However, neither the complaint nor the known extrinsic facts revealed any evidence that such scenarios occurred. In fact, the only extrinsic evidence offered by All Green was that it had performed the work properly and passed two inspections. The appellate court found that this contention by All Green did not support an argument that All Green did anything to damage the electrical cabinet after the work was completed. Therefore, the court noted, "the possibility that All Green had later damaged the otherwise properly installed cabinet and bolt was too...'tenuous and farfetched' to impose a duty to defend..." The appellate court went on to note that "All Green points to no authority permitting an insured to manufacture hypothetical scenarios beyond those encompassed by the pleadings or the facts known to the insurer in order to give rise to a duty to defend." Since there was no duty to defend, the claims for breach of contract and bad faith also were not supported and judgment was properly entered in favor of SNIC.
EFFECTS OF THE COURT'S RULINGThis case follows established California law to the effect that the insured cannot manufacture coverage by hypothesizing tenuous and far-fetched theories of liability which are unsupported by the allegations of the complaint or the extrinsic facts known to the insurer. The appellate court further noted that allegations of an excluded loss do not become covered merely by virtue of an insured's contention that it was not negligent, and thus not liable for the loss. Under such circumstances, there would be no loss to be indemnified and therefore no duty to defend.