United States: Thee Sombrero, Inc. v. Scottsdale Insurance Company

In Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal.App.5th 729 (October 25, 2018), the California Fourth District Court of Appeal reversed the trial court's entry of summary judgment in favor of Scottsdale Insurance Company ("Scottsdale") addressing whether indemnity coverage was afforded under the Scottsdale policy for the diminution in value of property as a result of the named insured, Crime Enforcement Services' ("CES"), negligent conduct related to a shooting on such property. The parties' dispute related to Thee Sombrero's ("Sombrero") lessee's operation of a nightclub on the property.

The City of Colton ("City") issued a Conditional Use Permit ("CUP") authorizing the use of the property as a nightclub. In 2007, Sombrero leased the property to new tenants who operated it as a nightclub called El Sombrero. In connection with the new tenancy, the City inspected the property; it approved a floor plan and it found that the property was in compliance with the floor plan. As part of the floor plan, the club had a single entrance door equipped with a metal detector.

CES provided security services at El Sombrero. Scottsdale provided coverage to CES under a corporate general liability policy. The policy afforded coverage for "property damage" caused by an "occurrence." "Property damage" was defined as either "(a) physical injury to tangible property, including all resulting loss of use of that property or (b) loss of use of tangible property that is not physically injured."

On June 4, 2007, one patron of El Sombrero shot and killed another. After the shooting, Sombrero learned that CES had converted a storage area into a "VIP entrance" to the club. The VIP entrance had no metal detector. The owner of CES admitted that the gun used in the shooting came into the club through the VIP entrance.

As a result of Sombrero's negligence, the City revoked the CUP and replaced it with a modified CUP which provided that the property could be operated only as a banquet hall. According to Sombrero, the change in the use of the property resulted in a diminution of value of $923,078.00. After securing a default judgment against CES, Sombrero filed a direct action against Scottsdale seeking indemnity coverage for such judgment pursuant to Insurance Code §11580(b)(2). In response, Scottsdale filed a motion for summary judgment arguing that the judgment secured by Sombrero for diminution in value of the property constituted economic loss, rather than "property damage" as defined in the Scottsdale policy. The trial court agreed and entered summary judgment in favor of Scottsdale.

In reversing the trial court's entry of summary judgment, the Court of Appeal reasoned as follows:

First, the appropriate focus is not on the loss of the entitlement, but rather on the loss of use of tangible property that results from the loss of the entitlement. We agree that in IPA, the liquor license was not tangible property. Nevertheless, the loss of the liquor license meant that Northwest Visions could no longer use its premises for the remunerative purpose of selling diners alcohol along with their food. Here, identically, the revocation of the CUP meant that Sombrero could no longer use the property as a nightclub.

Second, the reasonable expectations of the insured would be that "loss of use" means the loss of any significant use of the premises, not the total loss of all uses.

. . .

California law is in accord. In Hendrickson v. Zurich American Ins. Co. (1999) 72 Cal.App.4th 1084 [85 Cal. Rptr. 2d 622] (Hendrickson), a group of growers sued Crown Nursery, alleging that it sold them strawberry plants that had been damaged by an herbicide. (Id. at pp. 1086–1087.) Zurich insured Crown Nursery, but Zurich refused to defend (id. at p. 1087), arguing that the growers had not alleged any property damage. (Id. at p. 1089.) The appellate court disagreed: "Here, the growers' complaint may reasonably be construed as alleging that as a result of [Crown Nursery's] negligent delivery of defective plants, the growers suffered a loss of strawberry production, and thereby a loss of the use of their land. The policies in this case expressly state that '[l]oss of use of tangible property that is not physically injured constitutes 'property damage.' Thus, we conclude that the growers' action presents a potential for coverage which requires a defense." (Id. at p. 1091.) Hendrickson therefore supports our view that a loss of a particular use of tangible property can be property damage.

Scottsdale argues that Hendrickson involved a physical injury rather than a loss of use; it asserts, "[T]he court found the insured's contaminated strawberries could have potentially ruined tangible property, namely, the claimants' strawberry crop." Not so. As quoted above, the court specifically concluded that "the growers suffered ... a loss of the use of their land." (See Hendrickson v. Zurich American Ins. Co., supra, 72 Cal.App.4th at p. 1091, italics added).

In dictum, the court also reasoned that the right to occupy the property granted by the lease between Sombrero and the nightclub owner constituted a tangible property interest rather than an intangible property interest. The court stated as follows in connection with its observation:

In any event, the issue is not whether, as a technical legal matter, a leasehold is tangible property. Rather, it is whether an insured, reading his or her policy, would understand "tangible property" to include real property that he or she leases. If your leased apartment was rendered uninhabitable by some noxious stench, you would conclude that you had lost the use of tangible property; and if a lawyer said no, actually you had merely lost the use of your intangible lease, you would goggle in disbelief.

The Court of Appeal relied heavily on the argument that a reasonable insured would expect the Scottsdale policy to afford coverage for loss of use of tangible property measured by diminution in value. The Court of Appeal reasoned that economic loss constitutes a measure of such loss of use. The Court noted that economic loss, exclusively, without any accompanying physical injury or loss of use of tangible property would not qualify as "property damage" as defined in Scottsdale's policy. Here, Sombrero lost the use of the property as a nightclub. Hence, the court reasoned that the diminution in value of the property based on a nightclub use, as opposed to a banquet hall, constituted a measure of the loss of use of tangible property sustained by Sombrero.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions