In Hendrickson, the insurer argued that the growers’ claims for lost strawberry
production “do not allege a loss of use of property, but claim only economic losses
associated with the property, which does not constitute property damage.” (Hendrickson
13
v. Zurich American Ins. Co. of Illinois, supra, 72 Cal.App.4th at p. 1090.) The appellate
court disagreed: “[T]he alleged loss of profits or diminution in property value are not
solely economic losses, but damages because of property damage, and therefore
constituted alternative measures of any property damage allegedly sustained. [Citation.]”
(Id. at pp. 1091–1092.)
The correct principle, then, is not that economic losses, by definition, do not
constitute property damage. Like the court in Auto-Owners Insurance Company v.
Southeastern Car Wash Systems (E.D. Tenn. 2016) 184 F.Supp.3d 625, we “find[] it
difficult to conceive of loss-of-use damages as anything other than economic losses.
[Citation.]” (Id. at p. 630.) Rather, the correct principle is that losses that are exclusively
economic, without any accompanying physical damage or loss of use of tangible
property, do not constitute property damage.
Here, for the reasons already stated, Sombrero did suffer a loss of use of tangible
property. Moreover, 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.
At oral argument, Scottsdale asserted for the first time that Kazi v. State Farm Fire
& Cas. Co. (2001) 24 Cal.4th 871 is on point.2 There, the Tollaksons sued the Kazis,
2 Scottsdale had cited Kazi in its brief, but only as authority for the definition of “tangible property.”
14
claiming that they had an implied easement over the Kazis’ land and that the Kazis had
interfered with their easement. Moreover, they claimed that, absent the easement, their
own land “was not buildable.” (Id. at p. 876.) They alleged that the interference with the
easement had diminished the value of their own land by $400,000. (Ibid.)
The Kazis had three separate insurance policies that covered liability for property
damage. One defined property damage as “‘physical injury to or destruction of tangible
property, including loss of its use.’” (Kazi v. State Farm Fire and Cas. Co., supra, 24
Cal.4th at p. 876.) Another defined it as “‘ . . . damage to or loss of use of tangible
property.” (Id. at p. 877.) The third defined it as “‘physical damage to or destruction of
tangible property, including loss of use of this property.’” (Ibid.) The insurers failed to
defend. (Id. at pp. 876-877.)
The Supreme Court held that there was no potential coverage, and hence no duty
to defend, for two reasons. First, an easement is not tangible property. (Kazi v. State
Farm Fire and Cas. Co., supra, 24 Cal.4th at pp. 880-885.) Second, the Tollaksons had
not claimed that there was any physical damage to their own land. (Id. at pp. 885-887.)
Kazi is not controlling here because there is a crucial difference between the
policy language in Kazi and the policy language in this case. Kazi relied extensively (see
Kazi v. State Farm Fire and Cas. Co., supra, 24 Cal.4th at pp. 874-875, 878-884, 887) on
the earlier case of Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106.
Gunderson had held, among other things, that when a policy defines property damage as
“physical injury to or destruction of tangible property, including loss of its use,” it does
15
not cover the loss of use of property that has not been physically damaged. (Id. at
pp. 1117-1119.) Thus, in Kazi, the Supreme Court rejected any coverage for loss of use
of the Tollakson’s own land on the sole ground that it had not been physically injured.3
Here, however, the policy expressly defined property damage as including “[l]oss
of use of tangible property that is not physically injured.” (Section I, ante, italics added.)
Thus, unlike in Kazi, the mere fact that Sombrero’s property was not physically damaged
is not dispositive of the question of whether there was coverage for loss of use of that
property.
Finally, Scottsdale relies on Golden Eagle Ins. Corp. v. Cen-Fed, Ltd. (2007) 148
Cal.App.4th 976. There, a bank (WMB) sued its landlord (Cen-Fed), alleging that Cen-
Fed had failed to maintain and repair the air conditioning, elevator service, basement
restrooms, landscaping, common areas, interior walls, and paint and had failed to provide
contractually required parking. It further alleged that the failure to maintain and repair
had forced WMB to move its safe deposit boxes from the basement to the first floor, thus
preventing WMB from making any other use of the first floor and decreasing the number
of safe deposit boxes that WMB was able to rent out. (Id. at p. 981.)
3 The court even noted that its grant of review, with respect to any coverage for loss of use of the Tollaksons’ own land, had been “specifically limited” to whether that portion of the underlying action “involv[ed] physical property damage.” (Kazi v. State Farm Fire and Cas. Co., supra, 24 Cal.4th at p. 879, fn. 1.) Thus, there was no issue before the court regarding coverage for tangible property that is not physically injured.
16
The appellate court held that Golden Eagle had no duty to defend because WMB
was not making a claim for loss of use of tangible property:
“[A] review of the allegations in WMB’s complaint shows that there was no claim
for any physical injury to tangible property or for any loss of use of tangible property that
was not physically injured. Rather, WMB’s claim rested entirely on Cen–Fed’s alleged
breach of the lease and the resulting economic damage, including the need to replace its
safe deposit boxes to the first floor leased premises, which resulted in fewer boxes being
rented and the consequent denial of the use that first floor space for other purposes (that
is, a loss of rental income and loss of use of leased space). The jury determined Cen–
Fed’s breaches of the lease constituted a diminution in the value of the lease, that is, the
difference between the fair market value of WMB’s leasehold interest if the leased
premises were in the promised condition and the fair market value of those premises in
their actual condition. WMB’s leasehold interests were not tangible property; and
WMB’s claim against Cen–Fed did not seek to recover for damage to or the loss of use of
tangible property.
“Thus, WMB’s complaint and theory of recovery against Cen–Fed did not
constitute claims for ‘physical injury to tangible property’ and therefore they did not
constitute claims for ‘property damage.’ Rather, they amounted to claims for economic
harm suffered by WMB due to Cen–Fed’s failure to perform its contractual obligations.
. . . ‘The property loss section of the standard policy provides coverage for “physical
injury or destruction of tangible property which occurs during the policy term.” The
17
focus of coverage for property damage is therefore the property itself, and does not
include intangible economic losses, violation of antitrust laws or nonperformance of
contractual obligations. [Citations.] . . . “[S]trictly economic losses like lost profits, loss
of goodwill, loss of the anticipated benefit of a bargain, and loss of an investment, do not
constitute damage or injury to tangible property covered by a comprehensive general
liability policy . . . .’ [Citations.]
“Conceptually, Cen–Fed’s claim that the failure to maintain its building in the
condition in which it contracted to maintain it is no more a ‘property damage’ claim than
the claim of any property buyer who fails to obtain tangible property in the condition
promised or warranted. Such claims are for economic loss, not ‘property damage.’”
(Golden Eagle Ins. Corp. v. Cen-Fed, Ltd., supra, 148 Cal.App.4th at pp. 986–987.)
The lynchpin of this reasoning is that “WMB’s leasehold interests were not
Cal.App.4th at p. 987.) Golden Eagle did not cite any authority for this proposition, and
we have found none. As discussed above, in connection with IPA, we question whether
the proposition is valid; however, anything we have to say on the point is dictum, because
here Sombrero owned the property. Hence, we may accept, for purposes of argument,
that in Golden Eagle, WMB’s claim for the diminution in value of its leasehold interest
was a claim for economic loss, untethered to an interest in tangible property. Even if so,
here, Sombrero’s claim for the diminution in value of its ownership interest, even though
it was a claim for economic loss, was a claim for loss of use of tangible property.
18
Having so held, we need not discuss Sombrero’s alternative arguments that (1) the
loss of the CUP itself was a loss of use of tangible property and (2) the construction of
the new VIP entrance constituted physical damage to tangible property.4
IV
DISPOSITION
The judgment is reversed. Sombrero is awarded costs on appeal against
Scottsdale.
CERTIFIED FOR PUBLICATION RAMIREZ P. J.
We concur:
McKINSTER J.
MILLER J.
4 Scottsdale argues that, even assuming the construction of the new VIP entrance constituted physical damage to tangible property, that construction was not an “occurrence” within the meaning of the policy. However, because we do not base our opinion on the construction of the VIP entrance, we need not address this argument. Scottsdale does not argue that the shooting was not an “occurrence.”
19
AI Brief
AI-generated · verify before citing
Holding. The court held that the loss of the ability to use property as a nightclub due to the revocation of a conditional use permit constitutes a covered 'loss of use of tangible property' under the insurance policy, even in the absence of physical damage.
Issues
Whether the loss of the ability to use property as a nightclub due to the revocation of a conditional use permit constitutes 'property damage' under a liability insurance policy.
Whether economic loss resulting from the loss of use of tangible property is covered as 'property damage' under the policy.
Disposition. Reversed
Quotations verified verbatim against the opinion
“We will hold that Sombrero’s loss of the ability to use the property as a nightclub constituted property damage, which was defined in the policy as including a loss of use of tangible property.”
“The loss of the ability to use the property as a nightclub is, by definition, a “loss of use” of “tangible property.” It defies common sense to argue otherwise.”
“The correct principle is that losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”