Mere Possibility of Physical Damage Is Not Enough To Trigger Coverage

The case study posted yesterday, Is Loss to Frozen Embryos Covered? A Case Study in Named Perils Coverage for Personal Property, has a significant discussion regarding an issue that arises routinely with electronic equipment and spoilation losses regarding physical loss. For example, consider when the electricity to a wine vault malfunctions and the wine is subject to high temperatures for a period of time. How do you determine if the wine is actually damaged without opening the bottle and testing it? By testing it, one will destroy the wine product by exposing it to air or decrease its value by merely opening it.

The court made the following analysis of this situation in its ruling for the insurance company: 1       

Dr. Eyvazzadeh testified that she had requested Pacific Fertility to conduct a test of one of the Wongs’s embryos, but that Pacific Fertility declined; and, she went on, there is ‘no way to know’ whether the Wongs’s embryos actually sustained physical damage. And having determined that there is ‘no way to know’ whether the Wongs’s embryos had actual physical damage, she deemed them to be ‘worthless’ and ‘advised the Wongs that they should consider these embryos to have been irreversible compromised, no longer viable, and lost.’ That does not create a triable issue of material fact as to ‘physical loss.’

MRI…187 Cal.App.4th 766, 115 Cal.Rptr.3d 27 is persuasive. The issue there involved an insured’s claim under a business interruption policy for loss of income as a result of claimed damage to its magnetic resonance imaging machine after the machine failed to satisfactorily ramp up after it was ramped down. The trial court granted summary judgment for State Farm, on the basis that the insured could not demonstrate a ‘physical loss.’

The Court of Appeal affirmed, holding as follows: ‘In modern policies, ‘ “physical loss or damage’ ‘ is typically the trigger for coverage. [Citation.] Clearly, this threshold is met when an item of tangible property has been ‘physically altered’ by perils such as fire or water. [Citation.] However, serious questions crop up in instances when the structure of the property itself is unchanged to the naked eye and the insured claims its usefulness for its normal purposes has been destroyed or reduced. [Citation.] That the loss needs to be ‘physical,’ given the ordinary meaning of the term, is ‘widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.’ ‘…And, the court added: ‘A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, 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.’ [Citation.] … For loss to be covered, there must be a ‘distinct, demonstrable, physical alteration’ of the property.’…

Dr. Eyvazzadeh’s concession there is ‘no way to know’ whether the Wongs’s embryos had actual physical damage was devastating to the Wongs’s claim. And her conclusion that she deemed the embryos to be ‘worthless’ was not a substitute for evidence that any of the embryos actually had undergone a physical change. Again MRI is apt: ‘Neither diminution in value nor the cost of repair of replacement are active physical forces—they are not the cause of the damage … [they are] the measure of the loss or damage.’…Put slightly differently, ‘ ‘Diminution in market value’ is not a ‘peril’ at all; it is a method of measuring damages.’ (State Farm Fire & Casualty Co. v. Superior Court (1989) 215 Cal.App.3d 1435, 1444, 264 Cal.Rptr. 269.)

The mere possibility that the embryos had suffered physical damage was insufficient to create a triable issue of fact to trigger coverage. The Wongs had the burden of submitting evidence of actual physical alteration of the embryos. They did not, instead submitting evidence that there is ‘no way to know’ whether such damage had occurred. ‘No way to know’ was fatal to their claim, as it was in analogous cases. (See, e.g., Whittaker Corp. v. Allianz Underwriters, Inc. (1992) 11 Cal.App.4th 1236, 1241–1244, 14 Cal.Rptr.2d 659 [insured conceded that it was ‘impossible to determine’ when damage happened, and thus could not meet burden of proving damage occurred ‘during the policy period’]; Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 807, 26 Cal.Rptr.2d 391 [insureds conceded they ‘do not know what happened to their property,’ and thus could not meet burden of proving loss was caused by ‘accident’ as required by policy].)

In these cases, direct expert testimony is often required to prove the existence of physical damage to the insured property. Courts will normally require more than a mere possibility of damage.

Thought For The Day   

Focus on the possibilities for success, not on the potential for failure.

—Napoleon Hill

1 Wong v. Stillwater Ins. Co., No. A162893, — Cal.Rptr.3d —, 2023 WL 4285283 (Cal. App. June 30, 2023).