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Court of Appeal Holds Modification of Operating Permit Restricting Use of Property Constitutes Loss of Use of Tangible Property Covered Under Liability Policy

November 2, 2018

Thee Sombrero, Inc. v Scottsdale Ins. Co.
(E067505, October 25, 2018)

Plaintiff’s lessees operated a nightclub. After a fatal shooting at the nightclub, plaintiff’s conditional use permit (CUP) was revoked and replaced with a modified CUP, which provided that the property could be operated only as a banquet hall.

Plaintiff sued its security guard provider, alleging that the security guards’ negligence caused the shooting, that the shooting caused a modification of the CUP, and that the modified CUP, by limiting the use of the property, caused a diminution in its value. Following entry of a default judgment against the security guard provider, plaintiff filed a direct action against the provider’s liability insurance company under Insurance Code section 11580(b)(2).

The security guard provider’s policy covered liability for “property damage," which was defined to include “[l]oss of use of tangible property that is not physically injured.” Plaintiff contended that the partial loss of use of the property caused by modification of the CUP constituted “loss of use of tangible property that is not physically injured.”

The Court of Appeal agreed that because the insured’s negligence caused revocation and modification of the CUP, the resulting loss to plaintiff of the ability to use the property as a nightclub was a “loss of use” of “tangible property” covered by the policy, and not a strictly economic loss ordinarily excluded from coverage under a liability insurance policy.

More Information

For more information, please contact David M. Axelrad, Mitchell C. Tilner and H. Thomas Watson .

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