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Date: 04-18-2018

Case Style:

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

Case Number: B279456

Judge: Hall

Court: California Court of Appeals Second Appellate District Division Eight on appeal from the Superior Court, Los Angeles County

Plaintiff's Attorney: Timothy R. Hanigan

Defendant's Attorney: Lane J. Ashley and Jordon E. Harriman

Description: Plaintiff and appellant All Green Electric, Inc. (All Green),
appeals from a grant of summary judgment in favor of its insurer,
defendant and respondent Security National Insurance Company
(SNIC). All Green requested that SNIC defend a lawsuit alleging
that All Green negligently installed electrical equipment for a
medical scanner. The trial court concluded that the lawsuit fell
under a coverage exclusion for loss of use of property caused by a
deficiency in All Green’s work, and SNIC had no duty to provide a
defense. We affirm.
BACKGROUND
1. The Jacobs Lawsuit
In March 2012, J. Bruce Jacobs, a medical doctor, hired All
Green to perform electrical work as part of the construction of
Jacobs’s MRI and X-ray facility, including running power and
outlets to a room in which a mammography unit was to be
installed by Hologic, Inc. (Hologic). Hologic installed the unit but
then discovered it was not operating correctly due to a magnetic
field in the room. Hologic advised Jacobs to install the unit in a
different room, and Jacobs 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. Jacobs hired
MRI Corporation to install steel shielding in the second room, but
the magnetic field continued to interfere with the operation of the
unit.
Jacobs then 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.
3
Jacobs filed a complaint against All Green, Hologic, and
MRI Corporation. Jacobs asserted one cause of action for
negligence against All Green, alleging that All Green 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.” Jacobs alleged that 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.” Jacobs sought damages, including costs for
unnecessary modifications and repairs, payments to outside
sources for substitute mammography testing, operational costs
and expenses, damage to Jacobs’s reputation, lost profits, and the
loss of Jacobs’s HMO contract.
2. SNIC’s Denial of All Green’s Claim
All Green tendered defense of the lawsuit to its insurer,
SNIC, with whom it had policies covering liability for bodily
injury and property damage. All Green’s owner informed SNIC’s
senior claims examiner that All Green denied the allegations in
the complaint, that all the bolts had been properly tightened, and
that All Green’s work had passed two inspections.
SNIC ultimately denied All Green’s claim on the basis of
the “impaired property” exclusion in All Green’s policies.1 The
exclusion, titled in the policies as “Damage To Impaired Property

1 The impaired property exclusion “bars coverage for liability
arising out of a defect in a contractor’s work or failure to perform
a contract that renders other property useless or less usable.”
(Croskey et. al., Cal. Practice Guide: Insurance Litigation (The
Rutter Group 2017) ¶ 7:1484.2, p. 7E-52.) It does not apply when
property has been physically injured. (Id. at ¶ 7:1484.3.)
4
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 “[t]he
5
failure to tighten the bolt was a ‘defect, deficiency, inadequacy . . .
in . . . “your work” ’.” The letter further concluded that the
exception 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.”
3. Proceedings below
All Green filed a complaint against SNIC seeking a
declaratory judgment that SNIC had a duty to defend All Green
in the Jacobs lawsuit. The complaint also alleged breach of
contract and breach of the implied covenant of good faith and fair
dealing.
SNIC moved for summary judgment, arguing that the
impaired property exclusion applied. There were no disputed
facts in the parties’ separate statements.
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 court stated that the
Jacobs lawsuit “claims 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.” As to All Green’s
contention that it was not at fault, the court said “whether [All
Green] ultimately prevails in the underlying action has no
bearing on whether the claim itself is covered by the policy.”
All Green timely appealed.
6
DISCUSSION
1. Applicable law
“[A] liability insurer owes a broad duty to defend its
insured against claims that create a potential for indemnity.”
(Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081
(Horace Mann).) “ ‘[T]he carrier must defend a suit which
potentially seeks damages within the coverage of the policy.’ ”
(Ibid.) “The determination whether the insurer owes a duty to
defend usually is made in the first instance by comparing the
allegations of the complaint with the terms of the policy. Facts
extrinsic to the complaint also give rise to a duty to defend when
they reveal a possibility that the claim may be covered by the
policy.” (Ibid.)
“The insurer’s defense duty is obviated where the facts are
undisputed and conclusively eliminate the potential the policy
provides coverage for the third party’s claim. [Citation.] An
insurer is entitled to summary judgment that no potential for
indemnity exists if the evidence establishes no coverage under
the policy as a matter of law. [Citation.] We review an order
granting summary judgment de novo ‘ “ ‘when, on undisputed
facts, the order is based on the interpretation or application of
the terms of an insurance policy.’ ” ’ ” (Regional Steel Corp. v.
Liberty Surplus Ins. Corp. (2014) 226 Cal.App.4th 1377, 1389
(Regional Steel).)
“A trial court properly grants a motion for summary
judgment only if no issues of triable fact appear and the moving
party is entitled to judgment as a matter of law. (Code Civ. Proc.,
§ 437c, subd. (c).) ‘The moving party bears the burden of showing
the court that the plaintiff “has not established, and cannot
reasonably expect to establish,” ’ the elements of his or her cause
7
of action.” (Zubillaga v. Allstate Indemnity Co. (2017) 12
Cal.App.5th 1017, 1026.)
2. Analysis
In its opening brief, All Green primarily argues that SNIC
failed to establish the applicability of the impaired property
exclusion. In its reply, it focuses on the exclusion’s exception for
“sudden and accidental physical injury” to All Green’s work “after
it has been put to its intended use,” and argues that SNIC failed
to establish that the exception did not apply. We reject both
arguments.
a. Impaired property exclusion
All Green does not dispute that if a failure to properly
install the bolt and other electrical components led to the loss of
use of the mammography unit, the impaired property exclusion
would bar coverage for the damages claimed in the Jacobs
complaint. But All Green contends that there were other possible
reasons the bolt could have been loose independent of any
negligence on All Green’s part; All Green suggests a truck could
have hit the electrical cabinet, or vandals or an earthquake could
have damaged it. All Green argues that if it was not negligent or
otherwise deficient in the performance of its contract, then the
elements of the impaired property exclusion would not be met
and SNIC would have a duty to defend.
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
8
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, nor 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 Jacobs’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.
State Farm Fire & Casualty Co. v. Drasin (1984) 152
Cal.App.3d 864 (Drasin) is analogous. The Drasins were sued for
malicious prosecution by a business partner. (Id. at p. 866.)
They requested defense from their homeowner’s insurance
carrier, State Farm, which sought a declaratory judgment that it
had no duty to defend or indemnify. (Id. at pp. 866-867.) The
Court of Appeal affirmed summary judgment for State Farm.
(Id. at p. 870.) The court concluded that because liability for
malicious prosecution requires a finding of malice, indemnity was
barred by Insurance Code section 533, which states that “[a]n
9
insurer is not liable for a loss caused by the wilful act of the
insured . . . .” (Drasin, supra, at pp. 867-868, citing Maxon v.
Security Ins. Co. (1963) 214 Cal.App.2d 603.) On this basis, the
court held that the complaint “does not potentially seek damages
that come within the coverage of the subject policy. If the
Drasins’ original action against [the business partner] is held to
be without malice and therefore not wilful, then there is no
liability under the policy. Similarly, if the Drasins’ original
action against [the business partner] is held to be wilful and with
malice, again there is no liability under the policy.” (Drasin,
supra, at p. 868.) Because “ ‘[t]he obligation to defend is
predicated upon liability for the loss covered by the policy,’ ” and
there was no possibility of such liability, there was no duty to
defend. (Id. at pp. 868-869, italics omitted.)
Drasin supports the trial court’s conclusion here that
“whether [All Green] ultimately prevails in the underlying action
has no bearing on whether the claim itself is covered by the
policy.” Because SNIC would have no obligation to indemnify
regardless of whether All Green was negligent, either because
there was no liability or because the liability fell under the
impaired property exclusion, SNIC had no duty to defend.
All Green argues that SNIC’s coverage counsel was unable
in deposition to provide any facts supporting his conclusion that
the impaired property exclusion applied. All Green further
argues that SNIC was aware of extrinsic facts suggesting the
exclusion did not apply, namely All Green’s assurances that the
work was completed adequately and had passed two inspections.
Thus, All Green contends, SNIC could not conclusively establish
that the impaired property exclusion applied.
10
These arguments are unavailing. SNIC was entitled to
assess its duty to defend based on the allegations in the
complaint and any extrinsic facts that “reveal a possibility that
the claim may be covered by the policy.” (Horace Mann, supra, 4
Cal.4th at p. 1081.) The complaint did not give rise to any
covered liability. And the only “facts” All Green contends should
have been considered are denials of liability or evidence of due
care that, if true, would also obviate coverage. (See Drasin,
supra, 152 Cal.App.3d at p. 868.) Although a duty to defend
arises “[i]f any facts stated or fairly inferable in the complaint, or
otherwise known or discovered by the insurer, suggest a claim
potentially covered by the policy” (Scottsdale Ins. Co. v. MV
Transportation (2005) 36 Cal.4th 643, 655), here neither the
complaint nor the purported facts offered by All Green suggest a
coverable claim.
b. Exception for sudden and accidental physical
injury
In its reply brief, All Green turns its focus to the exception
to the impaired property exclusion—for “sudden and accidental
physical injury” to All Green’s work “after it has been put to its
intended use”—and argues that SNIC has failed to establish that
the exception does not apply.2 We disagree.
To the extent All Green is suggesting that its work could
have suffered a sudden and accidental physical injury caused by
someone or something other than All Green (such as the

2 All Green, as the insured, bears the ultimate burden of
proving at trial that an exception to a coverage exclusion applies.
(Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1192.)
We need not decide whether that same burden applies on
summary judgment; SNIC prevails even if it bears the burden.
11
aforementioned truck, vandals, or earthquake),3 this is simply
retreading the argument that it was not All Green’s negligence
that caused the mammography unit to malfunction. As discussed
above, under this circumstance there would be no liability and
thus no indemnity and corresponding duty to defend.
But in its reply brief All Green suggests some additional
scenarios in which All Green could have properly installed the
bolt, but itself later inadvertently damaged the electrical cabinet
and knocked the bolt loose. All Green proposes that All Green’s
owner could have returned to Jacobs’s facility after the work was
completed and “tripped and accidentally banged into the cabinet”
or one of All Green’s workers involved with a different project at
the facility “could have hit the electrical cabinet with a ladder or
other heavy equipment.”4 Although All Green does not so state,
presumably it means to propose scenarios in which All Green’s
negligence is the cause of the “sudden and accidental physical
injury,” in which case its liability arguably could be covered by
SNIC’s policies.
But the allegations in the complaint and the extrinsic facts
in the record do not “reveal a possibility” (Horace Mann, supra, 4
Cal.4th at p. 1081) that these scenarios occurred. The complaint

3 All Green does not cite case law or other authority
concerning the “sudden and accidental physical injury” exception
and does not explain how any of its proposed scenarios fall within
it. We assume without deciding that these scenarios would fall
within the exception if they occurred.
4 Again, we assume without deciding that these scenarios
would fall within the exception if they occurred and further
assume that but for that exception these scenarios would be
subject to the impaired property exclusion.
12
does not allege that All Green negligently damaged its work after
installing it; it alleges that All Green “fail[ed] 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.” These allegations do not
encompass the possibility that All Green properly installed the
bolt but later knocked it loose.
Nor has All Green identified any extrinsic facts suggesting
it damaged the electrical cabinet after the work was complete,
suddenly and accidentally or otherwise. When assessing the duty
to defend, “ ‘[t]he ultimate question is whether the facts alleged
[or known] “fairly apprise” the insurer that the suit is [or could
be] upon a covered claim.’ ” (Shanahan v. State Farm General
Ins. Co. (2011) 193 Cal.App.4th 780, 786 (Shanahan).) “ ‘[T]he
insurer has no duty to defend where the potential for liability is
“ ‘tenuous and farfetched.’ ” ’ ” (Ibid.)
The only extrinsic facts All Green has identified are its
owner’s statements to SNIC that All Green performed the work
properly and passed two inspections. While this information
certainly called All Green’s liability for poor workmanship into
question, it did not “ ‘ “fairly apprise” ’ ” SNIC that All Green
might have otherwise damaged the electrical cabinet after the
work was complete. (Shanahan, supra, 193 Cal.App.4th at
p. 786.) Indeed, All Green’s owner expressly denied any
negligence, telling SNIC that he “did not do anything wrong in
connection with the Project, and that All Green’s work on the
Project did not cause the electrical problems alleged in the
Jacob[s] Complaint.” Far from implying any liability on All
Green’s part, these statements instead would suggest to SNIC
that All Green had nothing at all to do with the damages claimed
13
by Jacobs. Under these circumstances, the possibility that All
Green had later damaged the otherwise properly installed
cabinet and bolt was too “ ‘ “ ‘tenuous and farfetched’ ” ’ ” to
impose a duty to defend on SNIC. (Ibid.)
All Green contends that to defeat summary judgment it
“need only provide any conceivable theory whereby the claim
could have been covered under the policies.” But that theory
must be based on the allegations in the complaint or extrinsic
facts known to the insurer at the start of the underlying lawsuit.
(Horace Mann, supra, 4 Cal.4th at p. 1081; see Montrose
Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295
[existence of duty to defend turns on “ ‘those facts known by the
insurer at the inception of a third party lawsuit’ ”].) All Green
points to no authority permitting an insured to manufacture
hypothetical scenarios beyond those encompassed by the
pleadings or the facts known to the insurer in order to give rise to
a duty to defend. But that is precisely what All Green is
attempting here.
Gray, supra, 65 Cal.2d 263, a seminal duty-to-defend case
cited extensively by All Green, does not support its position.
Gray held that an insurer had a duty to defend a lawsuit alleging
an intentional assault, despite a coverage exclusion for
intentional torts, because the allegations could support a
judgment that the conduct was unintentional. (Id. at p. 276.)
The duty to defend depended on the facts of the case, not the
theory of recovery: “In light of the likely overstatement of the
complaint and of the plasticity of modern pleading, we should
hardly designate the third party as the arbiter of the policy’s
coverage.” (Ibid.)
14
This holding is inapplicable here. In Gray, the allegation
that the insured physically attacked someone could support
numerous possible theories of liability, including intentional
assault and negligence. Under those circumstances, the insurer
could not deny a defense simply because the complaint chose to
pursue only one of those theories. Here, in contrast, we are not
presented with allegations or facts that under an unpleaded
theory might give rise to liability. Under any theory, All Green’s
failure to install the bolt properly would bar coverage under the
policy. And there were no extrinsic facts suggesting All Green
might have been negligent in some other, coverable respect that
might be added to the complaint at a later time.
At oral argument, All Green’s counsel emphasized Vann v.
Travelers Companies (1995) 39 Cal.App.4th 1610 (Vann), but this
case is also unavailing. In Vann, an insurer, citing a coverage
exclusion for liability resulting from pollution, refused to provide
a defense to an auto body shop in a lawsuit alleging that the shop
had “ ‘improperly handled and disposed of’ ” various hazardous
substances. (Id. at p. 1613.) The Court of Appeal reversed a
grant of summary judgment in favor of the insurer, in part
because the pollution exclusion contained an exception for sudden
and accidental discharges. (Id. at pp. 1612-1613, 1618.) The
court “note[d] the complaint contain[ed] only vague allegations
concerning the nature of the acts causing the alleged
contamination and [the insured’s] knowledge, expectation or
intent in connection with such acts.” (Id. at p. 1615.) Thus, the
allegations were “certainly broad enough to ‘raise the possibility’
that the environmental contamination alleged in the complaint
will fall within the coverage of [the insurer’s] policies.” (Ibid.)
Because the insurer had not “produce[d] undisputed evidence
15
precluding that possibility,” summary judgment was improperly
granted. (Id. at p. 1616.)
Vann is distinguishable from the case here. In Vann, the
complaint was broad, alleging the insured had released
pollutants without indication of how, when, or why. Under those
purported facts, the insurer was on notice of the possibility that
the discharge might have been sudden and accidental, just as it
might have also been intentional. The insured did not have to
invent facts to fit its potential liability within the terms of the
insurance policy; the existing allegations were sufficient for that
purpose. Here, in contrast, the complaint specifically alleges that
All Green’s negligence occurred when installing the bolt in the
first place, with no suggestion that it might have happened later.
There were no facts known to SNIC indicating that All Green had
been negligent in some other way. Thus, there was no potential
for covered liability creating a duty to defend.
c. Additional claims
The trial court also properly granted summary judgment on
All Green’s claim for breach of contract; SNIC could not breach
an obligation it did not have. The lack of an underlying
contractual obligation also precluded a claim under the implied
covenant of good faith and fair dealing. (Waller v. Truck Ins.
Exchange, Inc. (1995) 11 Cal.4th 1, 36 [“It is clear that if there is
no potential for coverage and, hence, no duty to defend under the
terms of the policy, there can be no action for breach of the
implied covenant of good faith and fair dealing because the
covenant is based on the contractual relationship between the
insured and the insurer.”].) The trial court properly granted
summary judgment on that claim as well.

Outcome: The judgment is affirmed. SNIC is entitled to costs on appeal.

Plaintiff's Experts:

Defendant's Experts:

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