|
Commercial Property |
Direct Peril/Cause Of Loss |
Covenant Of Good Faith And
Fair Dealing |
|
Physical Loss |
Efficient Proximate Cause |
Bad Faith |
As a result of storms in the
spring of 2005, MRI Healthcare Center of Glendale, Inc. (MHC's) landlord was
required to repair the roof over the room that housed its Magnetic Resonance
Imaging (MRI) machine. However, the roof repairs could not be done unless and
until the MRI machine was demagnetized or "ramped down."
Unfortunately, once the machine was ramped down, it failed to ramp back up.
This failure purportedly constituted "damage" to the MRI machine
resulting in loss of business income to MHC. Since this chain of events was set
in motion by the spring storms, MHC claimed that they were the "efficient
proximate cause" of the loss. Because the storms were covered under the
State Farm General Insurance Company (State Farm) policy issued to MHC, MHC
claimed it was entitled to recover both the amount it spent to repair the
machine and the loss of business income sustained while the machine was
inoperable.
When State Farm refused to
pay the claims in August 2007, MHC sued for breach of contract and breach of
the implied covenant of good faith and fair dealing. The trial court denied
summary judgment in favor of MHC and granted it for State Farm. MHC appealed.
Under Business Personal
Property coverage, the State Farm policy stated it would pay for accidental
direct physical loss to business personal property by an insured
loss. The Loss Of Income coverage stated it would pay if the suspension
during the period of restoration were caused by accidental direct
physical loss to property caused by or resulting from an insured
loss. A provision under Losses Not Insured stated that State Farm would
pay accidental direct physical loss resulting from certain losses
unless the resulting loss itself is excluded. State Farm's investigated MHC's
claim for water damage from a leak in the roof in an area adjacent to the MRI
area. Its investigation revealed that the leak was due to "wear, tear,
deterioration and faulty workmanship" and not from a covered accidental
direct physical loss.
On appeal, MHC argued that
the trial court erred, in part, because it focused on the "wrong"
event as the "proximate or efficient" cause of damage to the MRI
machine and in finding that the damage was not accidental. It also asserted
error in failing to recognize coverage for accidental direct physical damage
resulting from certain causes of loss otherwise excluded.
The appellate court agreed
with State Farm and held that the rainstorms were not the "direct"
cause of MHC having to demagnetize the MRI machine to allow repairs to be made
to the room. It determined that the MRI machine's failure to "ramp
up" after being repaired was not a "physical loss." In addition,
damage to the MRI machine from demagnetization was not accidental. Finally, the
rainstorms were not the "efficient proximate cause" of MHC's loss.
Correspondingly, the same
reasons for granting State Farm's motion for summary judgment supported denying
MHC's. There can be no breach of the implied covenant of good faith and fair
dealing unless policy benefits are due under the contract. The conclusion that
a bad faith claim cannot be maintained unless policy benefits are due is in
accord with the policy in which the duty of good faith is firmly rooted. That
guiding principle is based on contract law and the rule that neither party will
do anything that will injure the rights of the other to receive the benefits of
the agreement. The trial court's judgment was affirmed.
Court of Appeal, Second
District, Division 8 (California). MRI Healthcare Center of Glendale, Inc.,
Plaintiff and Appellant, v. State Farm General Insurance Company, Defendant and
Respondent. No. B213985. Aug 4, 2010. 187 Cal.App.4th 766, 115
Cal.Rptr.3d 27