Liability Insurance Can Cover Loss Of Value From Loss Of A Use Permit

In the recent decision Three Sombrero, Inc. v. Scottsdale Insurance Company, 18 C.D.O.S10377, a California appellate court held that insurance covered the loss of value of a business resulting form the business losing its permit to operate a nightclub in its premises. The case provided well-needed clarification in a confusing area of law and provides some key lessons for lawyers when pleading their cases.

In the case, the nightclub hired a security service that negligently admitted a patron with a gun. The patron shot and killed another patron, and the city took away the nightclub’s permit to operate. The nightclub sued the security company, and its insurer Scottsdale denied coverage. The Scottsdale policy covered the “loss of use” of “tangible property,” but Scottsdale claimed that the nightclub merely lost its intangible right to use the property in a certain way. The trial court inexplicably agreed, but the appellate reversed and chastised Scottsdale for taking a position that flew in the face of common sense.

Importantly, the appellate court examined numerous cases that appeared to support Scottsdale’s position and explained in detail why they do not apply. Luckily for the policyholder, the appellate court took the time and care to reach the correct, and just, decision.

The case also presents an important lesson for attorneys. The appellate court went over prior cases where there was no coverage under similar policies because they alleged only economic losses. The court emphasized here that the complaint alleged that the loss of the permit right resulted in the loss of use of the property as a nightclub, which in turn reduced the economic value of the business. Alleging that extra detail that the loss of use was the cause of the loss of value, amazingly, made the difference between a winning and a losing case.