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California Appellate Court Refuses to Expand Property Policy into an “All Loss” Policy

January 22, 2012

Joan E. Cochran, Esq.

Court Held Insurer Not in Bad Faith By Refusing to Pay Property Claim Since Turning Off MRI Machine Was Not “Accidental Physical Loss” under the Policy and Storm Not the Predominating Cause of the Property Damage to the MRI Machine

The California Court of Appeal for the Second District held the insurer did not act in bad faith in refusing to pay claim. In MRI Healthcare Center of Glendale Inc. v. State Farm General Insurance Company, the Court concluded that turning off an MRI machine in preparation for roof repairs did not constitute “accidental physical loss.” Also, the Court held that the storm was not an efficient proximate cause of the damage, because it was not the “predominating cause.” The predominating cause was the machine being turned off in order to make roof repairs needed to correct MRI’s improper installation of skylights. The Court noted that “if the insurer is expected to cover claims that are outside the scope of the first party property loss policy, an ‘all risk’ policy would become an ‘all loss’ policy.”

MRI sued State Farm General Insurance Company (“State Farm”) for breach of the duty of good faith and fair dealing and breach of contract when State Farm refused to pay for repair of the MRI machine and loss of income during its non-operation. State Farm issued a policy providing coverage for “accidental direct physical loss to business personal property at the premises.” The policy also covered loss of income caused by suspension of business operations that were “caused by accidental direct physical loss to property at the described premises.” Due to a previous storm, MRI’s landlord was required to repair the roof of MRI’s building. The roofing company discovered that, due to faulty skylights and roofing materials installed by MRI as tenant improvements, more extensive roof repairs were required. MRI made a claim for these roof repairs. State Farm agreed to pay for the roof damage claim. MRI then informed State Farm that in order for the repairs to continue, its MRI machine would need to be turned off or “ramped down.” State Farm notified MRI that any damage caused by the “ramping down” process would not be covered under MRI’s policy. The MRI machine was “ramped down” but failed to ramp back up. MRI submitted a claim to State Farm for the money it expended to repair the MRI machine plus the income loss sustained while the machine was inoperable. MRI claimed that the storms were the “efficient proximate cause” of the loss. State Farm refused to pay for such claim and MRI sued State Farm for bad faith breach of the insurance policy.

The trial court granted State Farm’s motion for summary judgment. MRI appealed. On appeal, State Farm argued that the MRI machine did not sustain “physical loss” nor was the alleged loss the result of an “accident” and the rainstorms were not the efficient proximate cause of the loss. The Court affirmed the trial court’s granting of State Farm’s summary judgment motion. The Court held that “physical loss” while not defined in the policy, precludes any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.

The Court noted that there was no distinct, demonstrable or physical alteration of the MRI machine. The MRI machine was merely turned off and could not be turned back on, which does not “constitute a comparable direct physical loss under the policy.” Further, the storms were not the cause of the entire roof being replaced.

The Court also held that the “ramping down” of the MRI machine was not accidental but instead was an intentional and deliberate act stating: “an accident…is never present when the insured performs a deliberate act unless some accidental, unexpected, independent, and unforeseen happening occurs that produces the damage.” The Court pointed out that MRI’s insurance agent informed State Farm six months prior to the machine being “ramped down” that there was a high possibility that the machine would not “ramp up” if it was “ramped down.” Thus, the occurrence was an expected result and neither the damage to the machine nor the loss of business income was accidental within the meaning of the policy.

The Court rejected MRI’s argument that the storms were the “efficient proximate cause” of its loss. The Court reiterated that an “efficient proximate cause” must be the “predominating” cause. While the storm may have “set in motion the course of events that led to the “ramp down” of the MRI machine,” it was the “ramping down” itself which was the sole and predominate cause of MRI’s loss. Further, there was no evidence that the MRI machine was damaged by wind, rain, or the storms.

By: Joan E. Cochran, Esq.

Cochran, Davis & Associates, P.C.

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