A California Court of Appeal recently held that the alleged loss of use of a premises as a nightclub qualified as “property damage” under a general liability insurance policy. Thee Sombrero, Inc. v. Scottsdale Ins. Co., 2018 WL 5292072 (Cal. Ct. App. Oct. 25, 2018).

Thee Sombrero, Inc. (Sombrero) owned and operated a nightclub in Colton, CA. After a fatal shooting at the club, city officials revoked Sombrero’s use permit and made it so the premises could only be used as a banquet hall. Sombrero sued its private security company, Crime Enforcement Services (CES), claiming that its subpar security caused the shooting and cost Sombrero its ability to run a nightclub on its property.

Sombrero alleged that the property was worth $2,769,231 as a nightclub and only $1,846,153 as a banquet hall. In 2012, Sombrero secured a default judgment against CES for $923,078 – the difference in value between the nightclub and banquet hall.

Sombrero then set its sights on CES’s insurer. In its complaint filed under Cal. Ins. Code § 11580, California’s direct action law, Sombrero alleged that the insurer was obligated to pay the judgment because Sombrero suffered covered “property damage.” The applicable policy covered “physical injury to tangible property, including all resulting loss of use of that property” or “loss of use of tangible property that is not physically injured.” The insurer argued that Sombrero’s loss of the permit to operate a nightclub constituted the loss of intangible property, not physical property damage. The court disagreed.

The court held that “the loss of the ability to use the property as a nightclub [was], by definition, a loss of use of tangible property.” The court supported this decision by holding that Sombrero’s ownership of the premises, the “dirt” and the “building,” constituted “tangible property.” Thus, when Sombrero lost its ability to use its property as a nightclub, it “lost the use of tangible property, that [was] not physically injured,” as contemplated by the policy. Further, the court found that the diminution in value was an appropriate measure of damages and did not make the injury purely an economic loss; rather, Sombrero suffered both an economic loss (the diminution of value) and a physical loss (the inability to use its property as a nightclub).

Thee Sombrero blurs the line between a strictly economic loss, such as lost profits, and the loss of use of property. If a plaintiff has the ability to tether its economic losses to some type of property right or physical loss, it may find coverage where it would otherwise be denied. As the Thee Sombrero court stated, to hold otherwise “defies common sense.”