A general liability policy covering “loss of use of property that is not physically injured” covered an insured whose negligence led to the claimant’s loss of ability to continue using its property as a nightclub. (Thee Sombrero, Inc. v. Scottsdale Insurance Company (2018) 28 Cal.App.5th 729)
Facts
Thee Sombrero, Inc. (Sombrero) owned a piece of commercial property in the City of Colton (City). The City issued a conditional use permit (CUP) authorizing the use of the property as a nightclub. The CUP required the nightclub to have a single entrance door equipped with a metal detector.
Sombrero leased the property to tenants who operated it as a nightclub. Crime Enforcement Services (CES) provided security guard services at the nightclub. At some point CES converted a storage area at the property into a “VIP entrance” that did not have a metal detector.
A nightclub patron armed with a weapon gained entrance to the nightclub through the VIP entrance and shot and killed another patron. Following the shooting, the City revoked the original CUP and replaced it with a modified CUP which provided that the property could be operated only as a banquet hall.
Sombrero sued CES, alleging that CES’s negligence caused the shooting, which in turn led to the revocation of the original CUP, which in turn lowered the rental value of the property and caused “lost income.” Sombrero obtained a default judgment against CES for $923,078, which represented the difference between the value of the property when used as a nightclub (per the original CUP) and the value of the property when used as a banquet hall (per the modified CUP).
Thereafter, Sombrero brought a “direct action” to collect the judgment from CES’s general liability insurer, Scottsdale Insurance Company (Scottsdale). The Scottsdale policy covered damages CES owed because of “property damage,” which was defined as “physical injury to tangible property” or “loss of use of tangible property that is not physically injured.” The trial court entered summary judgment in favor of Scottsdale, finding that the judgment Sombrero had obtained against CES in the underlying action did not represent damages because of “property damage” as defined in the Scottsdale policy. Sombrero appealed.
Holding
The California Court of Appeal reversed. In the underlying action, Sombrero alleged that CES’s negligence caused the revocation of the original CUP, which caused Sombrero to lose the ability to use its property as a nightclub. According to the appellate court, Sombrero’s “loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’”
Although revocation of the CUP itself was an injury to intangible property rights, revocation of the CUP led to an inability to use Sombrero’s premises, which was a loss of use of tangible property not physically injured. The appellate court reasoned that a loss of use of tangible property does not require a total loss of all use of the property, but rather only a loss of any significant use of the property. Further, once there is covered property damage, the policy covers any ensuing economic losses as damages “because of” property damage.
In short, Sombrero’s loss of the ability to use its property as a nightclub did constitute “property damage” within the meaning of the Scottsdale policy. Thus, the trial court had erred in granting summary judgment in favor of Scottsdale.
Comment
The appellate court cited an earlier case – Hendrickson v. Zurich American Ins. Co. of Illinois (1999) 72 Cal.App.4th 1084 – for the proposition that a “loss of use of tangible property not physically injured” does not require a loss of all use of tangible property, but rather only “a loss of a particular use of tangible property….” Thus, the fact that Sombrero could still use the property as a banquet hall was not dispositive. Sombrero could not use the property as a nightclub, and that constituted a loss of use of tangible property not physically injured.