All Green Electric, Inc. v. Security National Insurance Company

In All Green Electric, Inc. v. Security National Ins. Co., 22 Cal.App.5th 407 (March 19, 2018), the California Second District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Security National Insurance Company (“SNIC”) in connection with its denial of coverage of an underlying claim for negligent installation of electrical equipment by All Green Electric, Inc. (“All Green”). SNIC denied coverage of All Green based on the “impaired property” exclusion in its policy. The parties’ dispute arose out of an underlying lawsuit filed against All Green alleging that it had negligently installed electrical equipment at an MRI and x-ray facility. All Green’s work included running power and outlets to a room in which a mammography unit was to be installed by another contractor, Hologic, Inc. After Hologic installed the unit, it was discovered that it did not operate correctly due to a magnetic field in the room. Hologic advised the owner of the facility to install the unit in a different room and the owner retained All Green to run power to that room as well. Despite the move to the second room, the magnetic field persisted and the unit continued to malfunction. Thereafter, the facility owner hired MRI Corporation to install steel shielding in the second room, but the magnetic field continued to interfere with the operation of the mammography unit. Consequently, the facility owner 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.

Subsequently, the facility owner, Bruce Jacobs, filed a complaint against All Green, Hologic, and MRI Corporation. The complaint alleged that All Green breached its duty of care by failing to properly install all of the electrical components relating to the project, including, without limitation, failing to tighten one of the bolts in the utility cabinet installed by All Green. According to Jacobs, this negligence resulted in a magnetic field that interfered with the operation of the mammography unit and threatened the health of all persons in the facility. 

All Green tendered the defense of the Jacobs lawsuit to SNIC which had issued liability policies to All Green affording coverage for bodily injury and property damage. In response, SNIC denied All Green’s claim based on the impaired property exclusion in All Green’s policies. Such exclusion states as follows:

“Damage To Impaired Property Or Property Not Physically Injured,” states that the policies do 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 provision further states 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.”

The policies define “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.” As relevant here, “your work” is 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.”

SNIC’s denial letter explained that the mammography 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, the unit was “property that was not physically injured.” The exclusion applied because “the failure to tighten the bolt was a ‘defect deficiency, inadequacy… in… ‘your work’.” The letter further took the position that the exception to the exclusion for sudden and accidental physical injury to All Green’s work 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.”

In response to SNIC’s denial of the Jacobs lawsuit, All Green filed a complaint for declaratory relief, breach of contract and bad faith against SNIC. Thereafter, SNIC filed a motion for summary judgment arguing that the “impaired property” exclusion in its policy barred a duty to defend All Green against the Jacobs lawsuit. The trial court agreed with SNIC and entered judgment in favor of it, against All Green.

In affirming the trial court’s entry of summary judgment in favor of SNIC, the Court of Appeal stated as follows:

We disagree. The duty to defend arises if a lawsuit creates “a potential for indemnity,” that is, a potential for liability of a sort covered under the policy. [Horace Mann, supra 4 Cal.4th at p. 1081]. If there is no possibility of such liability, then there is no possibility of coverage and no corresponding duty to defend. Here, the only liability alleged in the complaint was a type not covered by the policy: the mammography unit’s temporary malfunction (loss of use) as a result of All Green’s purported failure to properly install the bolt and other electrical components (a deficiency in All Green’s work). All Green proposes no possible theory under which All Green would be subject to liability covered by the policy under these circumstances, no can we conceive of any. (See Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, fn. 15 (Gray) [“[T]he insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”].) Thus, it is undisputed that if Jacob’s allegations against All Green were found true, SNIC would not have to indemnify.

Nor would SNIC have to indemnify if, as All Green contended to SNIC’s claims examiner, All Green’s work was done properly and it was not responsible for the loose bolt. In 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.

The Court of Appeal also rejected All Green’s argument that the sudden and accidental physical injury exception to the exclusion applied to reinstate coverage for All Green. The Court of Appeal noted that All Green had failed to identify any allegations in the complaint or through extrinsic facts suggesting that All Green’s work had sustained sudden and accidental physical injury. Hence, the exception did not apply and potential coverage was not afforded under the SNIC policy for the underlying Jacobs lawsuit.