A suit against an insured seeking damages for “loss” of property was not a suit seeking damages for “loss of use” of property within the meaning of a standard commercial general liability policy. ( Advanced Network, Inc. v. Peerless Insurance Company (2010) 190 Cal.App.4th 1054)
Facts
Mission Federal Credit Union (Mission Federal) hired Advanced Network, Inc. (ANI) to service cash distribution machines in Mission Federal’s branch stores. Under their contractual arrangement, an ANI armored carrier would deliver cash to a Mission Federal branch. A single ANI employee would then enter the branch during non-business hours with a key and an alarm code, access the safe, remove cash designated for the cash machines, and replenish the cash machines.
ANI assigned an employee, Jacob Johnson, to service Mission Federal’s cash machines. Over a period of several years, Johnson stole approximately $2 million in cash from Mission Federal. Johnson concealed his misappropriation by submitting false records.
After the misappropriation was discovered, Mission Federal made a claim to its fidelity bond holder, Cumis Insurance Society, Inc. (Cumis). After Cumis applied a deductible, Cumis paid Mission Federal over $1.9 million for the theft of the cash.
Cumis (standing in the shoes of Mission Federal) then filed a subrogation action against ANI, asserting claims against ANI for breach of contract, negligence and respondeat superior. ANI tendered defense of the action to its commercial general liability insurer, Peerless Insurance Company (Peerless). The CGL policy provided that Peerless would indemnify ANI for damages because of “property damage” caused by an “occurrence” and not otherwise excluded, and that Peerless would defend ANI against any suit seeking covered damages. The policy defined “property damage” as (1) “physical injury to tangible property, including all resulting loss of use of that property,” and (2) “loss of use of tangible property that is not physically injured.”
Peerless declined to defend ANI against Cumis’ subrogation lawsuit asserting, among other things, that Cumis was not seeking damages from ANI because of “property damage” as defined in the Peerless policy. After Peerless refused to defend, ANI paid $1 million to settle Cumis’ subrogation action.
ANI then sued Peerless for breach of contract and bad faith, alleging that Peerless had wrongfully failed to defend and indemnify ANI in the underlying subrogation action brought by Cumis. The trial court ruled that Cumis’ underlying lawsuit against ANI was covered under the Peerless CGL policy. Following a jury trial, the trial court entered a judgment awarding ANI approximately $2 million in compensatory and punitive damages against Peerless. Peerless appealed.
Holding
The Court of Appeal reversed the judgment in its entirety. The appellate court concluded that in the underlying action, Cumis, as subrogee of Mission Federal, did not seek any damages from ANI because of “property damage” as defined in the Peerless CGL policy.
The appellate court’s opinion focused entirely on the second prong of the definition of “property damage,” i.e., “loss of use of tangible property that is not physically injured.” Although the appellate court apparently assumed that the stolen cash was “tangible property,” the court concluded that there was no claim for “loss of use” of the cash in the underlying subrogation action. Cumis had sought damages from ANI not for temporary “loss of use” of the cash, but rather for permanent “loss” of the cash. The Peerless policy only covered “loss of use,” and that term “cannot reasonably be interpreted to include the permanent loss of property through conversion.”
Since Cumis’ claim against ANI in the underlying action was not potentially covered under the Peerless policy, Peerless had no duty to defend or indemnify ANI against Cumis’ claim. As such, ANI was not entitled to recover anything from Peerless in the bad faith action.
Comment
The decision in this case is consistent with a prior decision, Collin v. American Empire, Ins. Co. (1994) 21 Cal.App.4th 787, in which the appellate court held that “‘loss of use’ of property is different from ‘loss’ of the property.” Both cases stand for the proposition that “loss of use” of property is intended to compensate for a temporary loss and is determined by rental value, while “loss” of property is intended to compensate for a permanent loss and is determined by replacement value. A suit which only seeks damages for “loss” of property due to conversion is not a suit seeking damages for “loss of use” of property within the meaning of a CGL policy.