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California Appellate Court Rules That Revocation Of Permit To Use Property As Nightclub Constitutes Property Damage

11.29.18

(Article from Insurance Law Alert, November 2018)

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Reversing a trial court decision, a California appellate court ruled that a policyholder’s inability to use property as a nightclub constituted covered property damage.  Thee Sombrero, Inc. v. Scottsdale Ins. Co., No. E067505 (Cal. Ct. App. Oct. 25, 2018).

Sombrero, a commercial property owner, obtained a conditional use permit to operate its premises as a nightclub.  Sombrero hired Crime Enforcement Services (“CES”) to provide security at the club.  After a fatal shooting at the club, the conditional use permit was revoked and replaced with a modified permit that allowed the property to be used only as a banquet hall.  Sombrero sued CES, alleging that CES’s negligence caused the shooting that resulted in the revocation of the permit, which in turn caused a diminution in property value and loss of income.  After a default judgment was entered against CES, Sombrero sued Scottsdale, CES’s liability insurer.  A California trial court ruled in favor of Scottsdale, holding that Sombrero’s claim was for economic loss, not covered “property damage.”  The appellate court reversed.

The policy defined property damage as “[p]hysical injury to tangible property” or “[l]oss of use of tangible property that is not physically injured.”  The appellate court concluded that the revocation of the permit constituted a loss of use of property because without the permit, Sombrero could not use the property as a nightclub.  The court stated that “the reasonable expectations of the insured would be that ‘loss of use’ means the loss of any significant use of the premises, not the total loss of all uses” (emphasis in original).  Additionally, the appellate court ruled that the trial court erred in finding only economic loss, explaining that diminution in property value was not the loss itself, but rather was a proper measure of damages for the loss of use of property as a nightclub.