The California Court of Appeal, Second Appellate District, affirmed an order granting summary judgment to an insurer arising from the insurer's denial of a claim for property damage and loss of income. The insured's MRI (magnetic resonance imaging) machine failed to "ramp up" after the insured had "ramped it down" to allow repairs of rainstorm-damaged roofing where the MRI was housed. The Court of Appeal held there was no "accidental direct physical loss" because the insured intentionally "ramped down" the MRI and was aware of the high probability the MRI would not "ramp up" once it was "ramped down."
State Farm General Insurance Company ("State Farm") issued a business policy to MRI Healthcare Center of Glendale, Inc. ("MHC"), an MRI scanning service business. The policy included first-party insurance coverage for business personal property and loss of income as a result of "accidental direct physical loss."
Rainstorms damaged the roofing over the room housing MHC's MRI machine. The company hired by MHC's landlord to repair the roof discovered that, as a result of MHC's improvements to the roofing several years earlier, rot and decay from long-term water intrusion required the entire roof be replaced. The landlord informed MHC repairs could not continue unless the MRI was "ramped down" (demagnetized).
MHC notified State Farm that once the MRI was ramped down, there was a high probability the MRI would not ramp back up to function properly. State Farm cautioned that if MHC suffered any damages as a result of the ramp down, it would not be covered under the policy. Regardless, MHC ramped down its MRI.
Once repairs to the roof were complete, the MRI did not immediately ramp back up. MHC sought damages from State Farm for costs incurred to repair the MRI and for income loss sustained while the machine was inoperable. State Farm denied the claim and MHC filed suit against State Farm for breach of the duty of good faith and fair dealing and breach of contract.
MHC moved for summary judgment contending rainstorms (a covered risk) necessitated repairs to the roof, which, in turn, necessitated the ramping down of the MRI. State Farm filed a cross-motion, contending that any loss MHC suffered from the ramping down of its MRI was deliberately done by MHC and therefore not an "accidental direct physical loss." The Superior Court agreed with State Farm, denied MHC's motion, and granted State Farm's cross-motion. MHC appealed.
The Second District Court of Appeal held that, in order for MHC to recover, MHC had to show it sustained either an "accidental direct physical loss" of the MRI or a loss of business income due to the "necessary suspension" of its operations caused by "accidental direct physical loss" to the MRI.
Although the policy did not define "accidental direct physical loss," the Court of Appeal reasoned the term "contemplates an actual change in insured property ? occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so." The change must have been without intervening persons or conditions. Further, an "accident," as it applied to the policy, was something unintended and unexpected by the insured.
The Court held MHC did not suffer "accidental direct physical loss" because the failure of the MRI to ramp up emanated from the inherent nature of the machine itself, rather than any physical damage to it. MHC was aware of this inherent nature, and even informed State Farm of the high probability the MRI would not ramp back up. The damage to the MRI was thus not caused by a fortuitous event; rather, it was directly caused by the intentional, intervening act by MHC when it ramped the machine down. Moreover, MHC's awareness of the potential loss of income and potential damage to the MRI should the machine fail to ramp back up made the damages expected and intended.
MHC contended the loss was an "accidental direct physical loss" because the rainstorms were the "efficient proximate cause" of its loss. According to MHC, the rainstorm damage set other contributing causes of the loss (i.e., the ramp down of the MRI) in motion. The Court disagreed, reasoning an "efficient proximate cause" analysis comes into play when excluded and covered perils interact to cause a loss. Coverage is found only where the "predominating" cause is the covered peril.
Here, the "predominating" cause for MHC's loss was not the rainstorms. Instead, the "predominating" cause of the damage to the MRI and the loss of income was the ramping down of the MRI (an excluded peril). Also, the Court noted the rainstorms did not cause the ramping down of the MRI; rather, it was only when the roofing company discovered rot and decay from long-term water intrusion (a non-covered risk) as a result of the improvements made by MHC years prior to the rainstorms, was it necessary to replace the entire roof (which, in turn, necessitated the ramp down procedure).
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