Hunton Insurance Recovery Blog: California Appeals Court Says Loss Of Use Is 'Property Damage' Under Liability Policy, And Damages Can Be Measured By Diminished Value

In a win for policyholders, a California appellate court has held that the loss of use of property resulting from alleged negligence constitutes property damage under a liability insurance policy.

In Thee Sombrero, Inc. v. Scottsdale Insurance Company, the property owner, Thee Sombrero, operated a venue as a nightclub. After a shooting inside the nightclub caused a patron's death, the local government revoked Sombrero's right to use the property as a nightclub and, instead, limited permissible use of the property to a banquet hall. Sombrero sued the security company it had hired to keep guns out of the club, alleging that it was the security company's negligence that caused the city to revoke Sombrero's nightclub use permit and that the loss of use of the facility as a nightclub resulted in damages of almost a million dollars based on an assessment of the property's diminished market value. The security company did not contest the claim, and Sombrero obtained a default judgment.

Armed with a default, Sombrero next sought to hold the security company's liability insurer, Scottsdale Insurance Company, accountable for the judgment. Sombrero asserted that the loss of its ability to use the venue as a nightclub constituted loss of use of tangible property under the security company's liability policy with Scottsdale. The insurer responded with a summary judgment motion, arguing that Sombrero suffered only uncovered economic losses, not tangible property damage. Relying on Scottsdale's economic losses argument, the trial court granted the motion.

On appeal, a unanimous appellate court reversed in favor of Sombrero. In doing so, the court held that Sombrero's inability to use the property as a nightclub constituted property damage based on the policy's...