Thee Sombrero, Inc. v. Scottsdale Ins. Co.
239 Cal. Rptr. 3d 416, 28 Cal. App. 5th 729 (2018)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The loss of a specific, valuable use of real property due to the revocation of a necessary permit constitutes 'property damage' under a commercial general liability insurance policy that defines property damage to include the 'loss of use of tangible property that is not physically injured.' Economic damages, such as diminution in property value, are a valid measure of such a loss and do not preclude coverage.
Facts:
- Thee Sombrero, Inc. (Sombrero) owned a commercial property in Colton, which it operated as a nightclub called El Sombrero under a conditional use permit (CUP).
- Sombrero hired Crime Enforcement Services (CES) to provide security for the nightclub.
- CES created an unapproved 'VIP entrance' to the club which did not have a metal detector, contrary to the approved floor plan.
- On June 4, 2007, a patron brought a gun into the club through the VIP entrance and shot and killed another patron.
- As a direct result of the fatal shooting, the City of Colton revoked the property's CUP for use as a nightclub.
- Sombrero later negotiated a modified CUP that only allowed the property to be operated as a banquet hall, a significantly less valuable use.
Procedural Posture:
- In a prior lawsuit, Thee Sombrero, Inc. sued Crime Enforcement Services (CES) and obtained a default judgment for $923,078.
- Sombrero then filed this direct action in trial court against Scottsdale Insurance Company, CES's insurer, to recover on the judgment.
- Scottsdale filed a motion for summary judgment, arguing Sombrero's claim was for an uncovered economic loss, not 'property damage.'
- The trial court granted summary judgment in favor of Scottsdale.
- Sombrero, the plaintiff, appealed the trial court's judgment to the Court of Appeal of California, the state's intermediate appellate court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the loss of the ability to operate a property as a nightclub, due to the revocation of a conditional use permit caused by a security company's negligence, constitute 'property damage' under an insurance policy defining it as the 'loss of use of tangible property that is not physically injured'?
Opinions:
Majority - Ramirez, P. J.
Yes, the loss of the ability to operate the property as a nightclub constitutes 'property damage' under the policy. The policy explicitly defines property damage as including the '[l]oss of use of tangible property that is not physically injured.' The court reasoned that the focus should be on the resulting loss of use of the tangible property (the building), not on the loss of the intangible permit itself. The revocation of the permit directly caused Sombrero to lose a specific and valuable use of its real property. The court rejected the insurer's argument that this was a purely economic loss, clarifying that while economic metrics like diminution in value are used to measure the damages, the underlying harm is the loss of use of tangible property, which is a covered event. This distinguishes the situation from cases involving purely economic losses untethered to any physical damage or loss of use of tangible property.
Analysis:
This decision clarifies that 'loss of use' in a commercial general liability policy can extend beyond physical unavailability to include the loss of a specific, legally permitted use. It sets a precedent that insurers cannot automatically deny coverage by categorizing the resulting damages as 'purely economic' or by focusing on the loss of an intangible right (like a permit) when that loss directly causes the loss of use of tangible property. This ruling is significant for businesses whose property value and income depend heavily on specific zoning or permits, as it affirms that negligence by a third party leading to the loss of such use can trigger insurance coverage, provided the policy language covers loss of use of non-physically injured property.
