28 Cal. App. 5th 729
Cal. Ct. App. 5th2018Background
- Sombrero, Inc. owned commercial property in Colton authorized by a conditional use permit (CUP) to operate as a nightclub; the CUP required city approval of the floor plan and changes.
- In 2007 new tenants opened El Sombrero; Crime Enforcement Services (CES) provided security; CES converted a storage area to a VIP entrance without a metal detector and the gun entered via that entrance.
- After a fatal shooting at the club the city revoked the nightclub CUP and reissued a modified CUP limiting the property to banquet-hall use, reducing the property's market value.
- Sombrero obtained a $923,078 default judgment against CES, alleging CES's negligence caused the CUP revocation and resulting diminution in value and lost income.
- Sombrero sued Scottsdale (CES’s liability insurer) under its policy (Ins. Code § 11580(b)(2)) to enforce indemnity; Scottsdale moved for summary judgment arguing the loss was economic, not covered "property damage."
- Trial court granted summary judgment for Scottsdale; the Court of Appeal reversed, holding loss of the ability to use the property as a nightclub is covered as loss of use of tangible property.
Issues
| Issue | Sombrero's Argument | Scottsdale's Argument | Held |
|---|---|---|---|
| Whether revocation of the CUP and resulting diminution in market value constitutes "property damage" under the policy definition that includes "loss of use of tangible property that is not physically injured" | The CUP revocation caused loss of use of tangible property (nightclub use); diminution in value is a proper measure of property-damage damages | The loss was a mere economic loss or loss of an intangible entitlement (use/right), not loss of use of tangible property, so policy does not cover it | Reversed: loss of nightclub use is loss of use of tangible property; diminution in value can measure damages for that loss and thus falls within policy "property damage" coverage |
| Whether prior cases (e.g., Kazi, IPA, Golden Eagle) compel finding no coverage | Reliance on Hendrickson and similar authority supports that loss of a particular use of land can be covered even absent physical injury | Relied on IPA, Kazi, Golden Eagle to argue intangible-loss/economic-loss precedents bar coverage | Court distinguishes Kazi/Golden Eagle/IPA on facts and policy language (policy here expressly covers loss of use of tangible property that is not physically injured) and finds Hendrickson persuasive |
Key Cases Cited
- Hendrickson v. Zurich Am. Ins. Co., 72 Cal.App.4th 1084 (Cal. Ct. App.) (loss of use of land from defective plants may present property-damage coverage)
- Kazi v. State Farm Fire & Cas. Co., 24 Cal.4th 871 (Cal.) (easement interference and limitations on coverage where policies required physical injury)
- Golden Eagle Ins. Corp. v. Cen-Fed, Ltd., 148 Cal.App.4th 976 (Cal. Ct. App.) (diminution in value of leasehold treated as economic loss, not property damage under those facts)
- Giddings v. Industrial Indemnity Co., 112 Cal.App.3d 213 (Cal. Ct. App.) (economic losses like lost profits ordinarily not property damage absent a link to physical property loss)
- Pruyn v. Agricultural Ins. Co., 36 Cal.App.4th 500 (Cal. Ct. App.) (diminution in market value can be a proper measure of property-damage damages)
- Scottsdale Ins. Co. v. Int'l Protective Agency, Inc., 105 Wash.App. 244 (Wash. Ct. App.) (holding a liquor-license loss was not loss of tangible property use under those facts)