Nightclub’s loss of value due to permit cancellation after shooting covered by general liability policy

A California appeals court, applying California law, reversed a lower court’s ruling and held that a venue owner’s loss of ability to use the property as a nightclub constituted property damage, not economic loss, and therefore it was covered under the applicable general liability policy.

Thee Sombrero, Inc. (“Sombrero”) owned a piece of commercial property in the city of Colton, which it leased to tenants to operate as a nightclub.  Crime Enforcement Services (“CES”) provided security guard services at the nightclub and obtained a corporate general liability policy issued by Scottsdale Insurance Company.  The policy covered CES’ liability for “property damage” caused by an “occurrence.”

In 2007, a patron of the nightclub shot and killed another.  CES had negligently failed to prevent the shooter from bringing the gun into the nightclub.  As a result of the incident, the city revoked the conditional use permit that had allowed Sombrero to operate the property as a nightclub.  Sombero managed to negotiate a modified permit that allowed it to operate a banquet hall on the premises.

In 2009, Sombrero sued CES for breach of contract and for negligence, alleging that the revocation of the nightclub permit substantially lowered the resale value of the property.  Three years later, Sombrero obtained a default judgment against CES for $923,078, which represented the difference in the value of the property before and after the nightclub permit was revoked.

In 2015, Sombrero proceeded to sue Scottsdale, seeking to force the insurer to pay the judgment against CES.  The trial court granted Scottsdale’s motion for summary judgment, holding that Sombrero’s economic loss did not stem from the loss of use of tangible property within the terms of CES’ policy.  Sombrero appealed the decision.

The appellate court disagreed with the trial court.  The appellate court explained how the economic loss was tied to Sombrero’s loss of use of its property and was therefore covered under the policy’s property damage provision.  Justice Ramirez concluded that, “the diminution in value of the property was a proper measure of the damages from that loss of use.  Thus, the mere fact that Sombrero was seeking to recover damages calculated on the basis of diminution in value falls short of showing that it was not seeking to hold CES liable for a loss of use of tangible property.”

As such, the appellate court held that the loss of the ability to use the property as a nightclub constituted covered property damage.  Thee Sombrero, Inc. v. Scottsdale Ins. Co., No. E067505 (Cal. Ct. App. Oct. 25, 2018).