Paustian Medical & Surgical Center, S.C. v. IMT Insurance Co. (Duty to Defend)

In Paustian Medical & Surgical Center, S.C. v. IMT Insurance Co. (2019AP141), the Court of Appeals District IV held that the insurer had no duty to defend because an impaired property exclusion applied.

Paustian contracted with RC Heating & Cooling so RC could design and install an HVAC system in the build-out of Paustian’s medical facility. After RC completed the project, Paustian sued RC and RC’s insurer IMT for breach of contract and negligence. Paustian alleged it lost income because it couldn’t use the build-out area for procedures and it incurred expenses for repairing RC’s work.

IMT argued and the court agreed that it had no duty to defend under its policy with RC. The policy excluded coverage for 1) property damage to property that has not been physically injured and 2) loss of use of property arising out of RC’s failure to perform a contract. This “impaired property” exclusion applied here because Paustian did not allege the HVAC system had been physically injured or caused physical injury to the Paustian facility – the HVAC system just had some deficiencies that required repair. The exclusion also applied because Paustian alleged its damages arose from RC’s breach of the contract for installation of the HVAC. Because the exclusion applied, IMT had no duty to defend.