Shanti Eagle | Policyholder Perspective | April 26, 2019
Insurers often claim “economic damages” are not covered under a standard commercial general liability (CGL) policy. The Fourth District Court of Appeal’s decision in Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729, 736 (2018) review and request to depublish denied (Jan. 30, 2019), demonstrates that “loss of use” can be measured by “economic damages”—i.e., loss in profit or diminution in value—so long as they are tied to a property interest.
In Thee Sombrero, Inc., the insured’s negligent security services resulted in the revocation of Thee Sombrero’s permit to use its property as a night club after a patron was allowed to enter without passing through the metal detector, resulting in a fatal shooting. Thee Sombrero sued the security company, and obtained a default judgment. Thee Sombrero then pursued Scottsdale to satisfy the judgment. The trial court found in favor of Scottsdale, but the Court of Appeal reversed, finding that “the loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’ It defies common sense to argue otherwise.” Id.
Despite the fact that Thee Sombrero obtained a permit to use the property as a less profitable banquet hall, its inability to use the property as it had been using it previously—and the diminution in property value and lost profits as a result—constituted covered damages under the policy. The Scottsdale policy at issue included the standard ISO policy language defining “property damage” to include “loss of use of tangible property that is not physically injured.” Id. at 733. “Sombrero’s claim for the diminution in value of its ownership interest, even though it was a claim for economic loss, was a claim for loss of use of tangible property.” Id. at 742. In fact, it is “difficult to conceive of loss-of-use damages as anything other than economic losses.” Id. at 739 (quotations omitted).
The court rejected Scottsdale’s argument that this was an intangible right to use the property in a certain way, not a property interest. The court made clear that a total loss of use was not required under the terms of the policy. Rather, “anysignificant use of the premises” can be compensable loss of use for which the insured has a reasonable expectation of coverage. Id. at 737. The court also pointed out that the holding was in accordance with long-standing California law. Id. at 737 (citing Hendrickson v. Zurich Am. Ins. Co., 72 Cal. App. 4th 1084, 1091–92 (1999)). The California Supreme Court apparently agreed; in January, the Court declined review while simultaneously denying a petition to have the case depublished.
The takeaways from Thee Sombrero, Inc. are that, under a standard CGL policy:
a) “loss of use means the loss of any significant use of the premises, not the total loss of all uses;”
b) loss of use damages can be calculated on the basis of diminution in value or other “economic losses,” so long as they are tethered to an interest in tangible property; and
c) the revocation of a permit or other impairment of permissible use can constitute a covered loss of use claim.
This case provides a powerful basis for rebuffing the oft-repeated insurers’ adage that claimed damages are “strictly economic” and therefore not covered. Coverage for partial loss of use and permitting economic measures of loss of use damages are not novel concepts; however, the theory that the loss of a government permit can be a loss of use is. The Thee Sombrero, Inc. court declined to follow the single other court to have addressed this argument on similar facts. See id. at 737 (citing Scottsdale Ins. Co. v. Int’l Protective Agency, Inc., 105 Wash. App. 244 (2001)). In doing so, the court has opened the door for coverage under a CGL policy where the insured’s negligence caused a government body to take an action that impeded the claimant’s property rights.