Intangible Economic Losses Could Provide a Measure of Damages for "Loss of Use" Claims


In Thee Sombrero, Inc. v. Scottsdale Insurance Company, 28 Cal. App. 5th 729 (Cal. App. 4th 2018), Thee Sombrero (Sombrero) owned a commercial property in which its lessees operated a nightclub called El Sombrero under a conditional use permit (CUP). Sombrero hired Crime Enforcement Services (CES) to provide security services at the nightclub. In June 2007, an El Sombrero patron shot and killed another patron. Sombrero learned after the shooting that CES had converted a storage area into a "VIP" entrance to the club that had no metal detector, which is how the gun used in the shooting got into the club. As a result of the shooting, the CUP was revoked and replaced with a modified CUP that restricted use of the property as a banquet hall only.

In May 2009, Sombrero sued CES for breach of contract and negligence, alleging its failure to frisk the shooter was the cause of its nightclub permit's revocation, which lowered the property's value. In May 2012, Sombrero obtained a default judgment against the security firm on the basis the property went from being valued at approximately $2.8 million to $1.8 million, with a difference in value of $923,078. After obtaining a default judgment from CES in the amount of $923,078, Sombrero brought a direct action against CES's liability insurer, Scottsdale Insurance Company, seeking recovery of its damages.

Sombrero asserted that the loss of its ability to utilize the venue as a nightclub constituted a "loss of use of tangible property" under the CES's commercial general liability policy with Scottsdale. Scottsdale filed for summary judgment, arguing that Sombrero's loss of the CUP was not a "loss of use of tangible property" within the meaning of the policy, and Sombrero suffered only uncovered economic loss, not tangible property damage. Relying on Scottsdale's economic loss argument, the trial court granted Scottsdale's motion.

On appeal, a unanimous appellate court reversed in favor of Sombrero. The court held that Sombrero's inability to use the property as a nightclub constituted "property damage" as defined in the policy, which included "[l]oss of use of tangible property that is not physically injured." The court also held that a proper measure of damages for a loss of use of property that is not physically injured might be the property's diminution in market value. The court explained, "[i]n the liability policy context, diminution in market value is accepted as a proper method of measurement of any property damages which may have been sustained." Thus, the property's diminution in value properly served as a measure of Sombrero's damages.

Comment: The Thee Sombrero decision has significant implications in all jurisdictions, given the use of similar if not identical language in commercial general liability policies nationwide. The appellate panel treated Sombrero's economic loss as a measure of its damages from what was admittedly only a partial loss of use of the venue as a nightclub. Accordingly, Insurers should be aware of this decision because the court's interpretation of "loss of use" holds that the loss of a particular use satisfies the definition of "property damage" even where the property itself is able to be used in any number of ways. Ultimately, the court's holding turned on its opinion that, without more, the term "loss of use" is ambiguous and thus should be construed against the drafter.

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