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Finding Coverage for Loss of Use of Property

Interpretation of an insurance policy is a generally a question of law.

Jimmy “The Bud” Weedman owns the largest chain of medical marijuana supply dispensaries in Southern California.  Jimmy invented and patented a technique for trimming his plants to make his marijuana a more potent pain killer.  His company’s slogan is “It will kill your pain and anything else that ails you!” 

Bud Weedman decided he would take advantage of the new recreational marijuana use laws passed in California.  He bought a local warehouse and obtained a conditional use permit (CUP) to operate the property as a nightclub.  He had a separate room where the patrons could use hookah pipes supplied by the nightclub to consume marijuana that Bud Weedman was selling from his dispensary next door to the nightclub.  Bud Weedman decided he did not want to spend the time to operate his new nightclub, which he called “Killer Weed,” so he leased the property to Crackhead Craig.  Crackhead Craig changed security companies and hired a security company called “We Get ‘Em Security” (WGES).  In addition, Crackhead changed the configuration of the nightclub.  Prior to Crackhead leasing the property, Bud Weedman had only one entrance for the patrons.  The entrance had metal detectors and security guards to search patrons for weapons.  However, Crackhead realized that he was making a great deal of money from the “Killer Weed” recreational marijuana room by selling pizza and other food items to the patrons who had the “munchies.”  Crackhead opened a second entrance to permit patrons to enter the Killer Weed room directly instead of having to go through the metal detector at the front door.  There were no metal detectors for the entrance to the Killer Weed recreational marijuana room.

One night a patron recently released from Donovan State Prison visited the Killer Weed nightclub.  After seeing the length of the line at the front door because of the security check, the patron went around to the side door and entered the Killer Weed recreational marijuana room directly.  The patron consumed an excessive quantity of marijuana, got into several arguments, pulled out a gun, and shot several people before fleeing the scene.

After an investigation, the conditional use permit to use the property as a nightclub was revoked by the City Zoning Board but it issued a modified conditional use permit that permitted the property to be used for ballroom dancing.  Business dramatically dropped after the conditional use permit to use the property as a nightclub was revoked.  Crackhead Craig could not make his lease payments and Bud Weedman terminated the lease with Crackhead Craig.

Bud Weedman retained his brother-in-law, Billy Greenhorn, to be his attorney to file a claim against WGES.  Attorney Greenhorn had recently passed the bar exam after completing a correspondence course from a law school he had learned about on the back of a matchbook cover.  WGES was insured by Allsnake Insurance Company under a commercial general liability (CGL) insurance policy.  Attorney Greenhorn filed a claim on behalf of Bud Weedman claiming that Bud Weedman had lost $925,000 because of the loss of the conditional use permit to operate as a nightclub and the issuance of a modified conditional use permit for ballroom dancing being the only use of the property under the modified CUP.  Attorney Greenhorn claimed the negligence of WGES by failing to properly search the patron caused the damages to Bud Weedman.  The $925,000 represented the loss in value of the property and its rental value due to the modification of the conditional use permit.

Allsnake Insurance assigned the matter to Sean McScrewem.  Adjustor McScrewem denied the claim.  Adjuster McScrewem contended that the policy covered only property damages for the damage to or loss of use of tangible property.  In this case, the loss was only of intangible property rights, which occurred when the original CUP was revoked and a modified CUP issued that changed the permitted use of the property.  Attorney Greenhorn filed suit against WGES.  Allsnake refused to provide a defense to WGES.  A default judgment was obtained for $925,000.  The complaint alleged that WGES failed to frisk the shooter and this failure caused the revocation of the conditional use permit.  It was alleged that the revocation of the CUP lowered the re-sale and rental value of the property and caused lost income.  As damages, the complaint sought “the reduction in fair market value of the property” and “lost income.”  Bud Weedman submitted a declaration in support of the default judgment in which he confirmed that the property had been valued at $2.925 million with its large occupancy and nightclub entitlement under the original CUP.  After losing the original CUP and the modified CUP  permitted only ballroom dancing, the property was valued at only $2 million.  The difference in value is $925,000.  The $925,000 represents the loss in value due to the modification of the conditional use permit. 

Following the entry of the default judgment, Attorney Greenhorn filed a direct action against Allsnake to enforce the judgment against the insurance policy it had issued to WGES.  Allsnake answered and moved for summary judgment.  Allsnake contended that losing the original CUP was not a loss of tangible property, but merely the loss of an intangible right to use the property in a certain way.  It contended that coverage for property damage does not include economic loss.  After reading Allsnake’s Motion for Summary Judgment, Attorney Greenhorn approaches you for advice

CGL Policies Cover Damages to Tangible Property and Loss of Use of Tangible Property

Coverage in a CGL policy or any other general insurance policy will usually refer to injury or damage as tangible property.  Tangible property is property with physical substance that is apparent to the senses and does not refer to or include within its meaning mere economic or property rights, such as damages for lost profits or loss of investment.  (Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846.)  When a claim is for strictly economic losses such as lost profits, loss of good will, loss of the anticipated benefit of a bargain, or loss of someone’s investment, such damages do not constitute “damage or injury to tangible property” that would be covered by a comprehensive general liability policy (CGL policy).  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213; Warner v. Fire Ins. Exchange (1991) 230 Cal.App.3d 1029.)  However, when a complaint seeks to recover economic losses such as lost profits, loss of good will, and loss of investment where those intangible economic losses provide a “measure of damages to physical property which is within the policy’s coverage,” those economic losses will be covered.  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 219; Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 17-18.)

Whenever you are handling a case that involves economic losses arising out of contractual relationships, you must carefully read the defendant’s insurance policy.  Most policies will define property damages as “physical injury to or destruction of tangible property, including loss of its use.”  Other policies may define it as “damage to or loss of use of tangible property” and, finally, another frequently used definition is “physical damage to or destruction of tangible property, including loss of use of this property.” 

Therefore, property damage can occur in two ways.  First, there may be physical damage to or destruction of the actual tangible property.  Second, property damage may occur because there has been the loss of use of that tangible property. 

A recent case addressed the application of the “economic loss rule” to the defense raised by carriers that there has been no damage to tangible property.  The case was Thee Sombrero, Inc. v. Scottsdale Insurance Co. (2018) 28 Cal.App.5th 729.  The Crackhead Craig factual scenario described above was inspired by the Sombrero decision.  The decision contains an excellent analysis of when the economic loss rule does not apply and clearly affirms that property damages can be covered when the claim is based only upon loss of use of the property coupled with economic losses used to measure the loss of use.  In the Sombrero decision, the court held that the loss of use of a conditional use permit where the property owner could no longer operate his property as a nightclub and could only use it for a banquet hall resulted in the loss of use of the property as a nightclub.  The court in Sombrero held that the loss of use damages were covered under the express definition of property damages in the Scottsdale insurance policy.  It also provides strong dicta that the same result would occur to provide coverage in a lease situation.

Anyone facing coverage arguments by an insurance carrier where there is a breach of contract or contractual rights that had been affected should carefully read Thee Sombrero, Inc. v. Scottsdale Insurance Co. case.  It will help you to understand the difference between physical damages to tangible property that can be covered versus economic damages that can be covered because there has been a loss of use of the property.


I suspect that you would recommend that Attorney Greenhorn retain you and split his fee so you can prepare and file your own motion for summary judgment based upon the Sombrero decisionAfter all, interpretation of an insurance policy is a generally a question of law.  (Ameron Intern. Corp. v. Insurance Co. of State of Pennsylvania (2010) 50 Cal.4th 1370, 1377-1378.)

This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2019). Finding coverage for loss of use of property. Trial Bar News, 42(1), 11-12, 29.

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