A recent coverage dispute presented a fascinating combination of two classic and thorny legal issues – what is the “proximate cause” of a loss, and what constitutes an “accident” for the purposes of insurance coverage. See MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., No. B213985 (Cal. App. Ct. 2d Dist. Aug. 4, 2010).
The facts were essentially as follows: A storm damaged the exterior of a building in which the insured conducted its MRI imaging business. When the exterior of the roof was being repaired, it was discovered that the interior had suffered long-term water damage (a non-covered risk), and the entire roof needed to be replaced. In order for the roof to be replaced, the MRI machine needed to be demagnetized, or “ramped down.” When MRI machines – particularly older ones – are “ramped down,” they often cannot then be “ramped up” again. That is what happened in this case. The insured then sought coverage for the “damage” to the MRI machine.
The policy covered loss of business income caused by “direct physical loss,” which was undefined. The insured contended that the storm was the “efficient proximate cause” of the MRI machine’s demise, but the California Court of Appeals rejected this contention. The court found that even if the storm set in motion a course of events that led to the ramp-down of the machine, it “ultimately was the ramping down itself that was the sole, and predominating, cause” of the loss. The court also noted that it was only after the structural damage (again, a non-covered risk) was discovered that the MRI machine needed to be “ramped down.”
The court also found that the fortuity requirement inherent in all insurance was not fulfilled in this case – in other words, the loss was not “accidental.” The ramping down of the machine was intentional, said the court, and the machine’s failure to ramp back up “was an expected, although unwelcome, result of the ramp down.”