Despite the move to the second room, the magnetic field persisted and the unit continued to malfunction. Dr. Jacobs asserted that he 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, according to Dr. Jacobs.

Dr. Jacobs asserted a cause of action for negligence against All Green, alleging that All Green had breached its duty of care “by failing to properly install all 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.” Dr. Jacobs alleged that this negligence had resulted in a magnetic field that “interfered with the operation of” the mammography unit and “threatened the health of all persons in the facility.” Dr. Jacobs sought damages, including costs for unnecessary modifications and repairs, payments to outside sources for substitute mammography testing, operational costs and expenses, damage to Dr. Jacobs' reputation, lost profits, and the loss of Dr. Jacobs' HMO contract.

All Green tendered defense of the lawsuit to its insurer, Security National Insurance Company (“SNIC”).

SNIC denied All Green's claim on the basis of the “impaired property” exclusion in All Green's policy. Its 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.” The exclusion applied, according to SNIC, because “[t]he failure to tighten the bolt was a 'defect, deficiency, inadequacy . . . in . . . “your work.”'”

All Green went to court, seeking a declaratory judgment that SNIC had a duty to defend All Green in the Jacobs lawsuit.

SNIC moved for summary judgment, arguing that the impaired property exclusion applied.

The trial court granted summary judgment in favor of SNIC, finding that the damages claimed in the Jacobs lawsuit fell under the impaired property exclusion. The trial court stated that the Jacobs lawsuit claimed “negligence on the part of [All Green] for failure to tighten a bolt that resulted in loss of use of the mammogram machine. That is property damage (loss of use) to impaired property (property that cannot be used which incorporates [All Green's] work thought to be deficient) which arose out of the alleged deficient work.”

All Green appealed.

The Security National Policy

The Security National Insurance policy stated that it 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.

It further stated that:

This 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 policy defined:

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. 

In addition, the policy defined:

your work 

as:

Work or operations performed by you or on your behalf 

as well as:

Materials, parts or equipment furnished in connection with such work or operations. 

The appellate court affirmed.

In its decision, the appellate court found that the only liability alleged in the Jacobs complaint was a type not covered by the SNIC 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 (an alleged deficiency in All Green's work).

According to the appellate court, All Green proposed “no possible theory” under which All Green would be subject to liability covered by the policy. The Jacobs complaint specifically alleged that All Green's negligence had occurred when installing the bolt, with no suggestion that it might have happened later, the appellate court added. Because there were no facts known to SNIC indicating that All Green had been negligent in some other way, there was no potential for covered liability creating a duty to defend, the appellate court concluded.

The case is All Green Electric, Inc. v. Security National Ins. Co., No. B279456 (Cal. Ct.App. March 19, 2018). Attorneys involved include: Lang, Hanigan & Carvalho and Timothy R. Hanigan for Plaintiff and Appellant. Lewis Brisbois Bisgaard & Smith, Lane J. Ashley and Jordon E. Harriman for Defendant and Respondent.