Court Finds That Limitation on Conditional Use Permit Results in Covered Property Damage Due to Loss of Use

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel LLP | October 30, 2018

In Thee Sombrero, Inc. v. Scottsdale Ins. Co. (No. E067505, filed 10/25/18), a California appeals court held that a property owner’s loss of the ability to use his property as a nightclub, based on revocation of a city’s conditional use permit (“CUP”), constituted covered property damage.

In Sombrero, lessees operated a nightclub under the property owner’s conditional use permit from the City of Colton. A company hired to provide security negligently allowed admission to an armed patron, who shot and killed another patron. The City revoked the owner’s permit, and the owner was only able to negotiate the reinstatement of a limited permit, for use as a banquet hall only.

The property owner sued the security company claiming that “negligence” “lower[ed] the resale and rental value of the Property” and caused “lost income.” As damages, the owner sought “the reduction in fair market value of the Property” as well as “lost income.” According to the complaint, “[t]he property went from being valued at $2,769,231 … with its large occupancy and nightclub entitlement, to being valued at $1,846,153 after the modified conditional use permit allowing for private banquet use….” Since “[t]he difference in value is $923,078…. [Sombrero] is seeking negligence damages against [CES] … in the amount of $923,078, which represents the loss in value due to the modification of the conditional use permit.”

The security company defaulted, and the property owner brought a direct action against the security company’s insurer, Scottsdale. The Scottsdale policy covered liability for “property damage” caused by an “occurrence.” “Property damage” was defined as either (a) “[p]hysical injury to tangible property, including all resulting loss of use of that property,” or (b) “[l]oss of use of tangible property that is not physically injured.” “Occurrence,” was defined as “an accident.”

Scottsdale argued that the loss of the CUP was not a loss of use of tangible property but merely the loss of an intangible right to use property in a certain way. It also argued that the damages were for economic loss, not property damage. The owner argued, among other things, that it lost the use of tangible property due to the revocation of the CUP. It also argued that when an economic loss results from the loss of use of tangible property that is covered as property damage.

Although Scottsdale obtained summary judgment, the appeals court reversed. Noting first that establishing coverage for indemnity carries a higher burden of proof than the duty to defend, the court said that duty to defend case law is nonetheless relevant, because “[i]f a case holds that there is no duty to defend on facts similar to those here, it necessarily follows that there is also no duty to indemnify.”

The Sombrero court then stated that “[t]he 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 court disagreed with a Washington case cited by Scottsdale for the proposition that loss of a liquor license does not result in loss of use of tangible property, and noted that in Cunningham v. Universal Underwriters (2002) 98 Cal.App.4th 1141, the court based its determination of coverage on whether the tenant was ever in actual possession, pointing out that Sombrero was the owner and, therefore, necessarily had a possessory interest.

As to the economic loss argument, the Sombrero court stated that “[t]he correct principle, then, is not that economic losses, by definition, do not constitute property damage…. 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.” And having said that, the Sombrero court also stated that diminution in value can be a proper measure of loss of use damages.

The Sombrero court went on to distinguish Kazi v. State Farm Fire & Cas. Co. (2001) 24 Cal.4th 871, which involved an easement, saying that “an easement is not tangible property.” Further, the Sombrero court distinguished the policy language at issue in Kazi, because the policy there did not cover the loss of use of property that was not physically damaged.

Finally, the Sombrero court took issue with Golden Eagle Ins. Corp. v. Cen-Fed, Ltd. (2007) 148 Cal.App.4th 976, where the court found no coverage when a bank sued over a landlord’s failure to maintain that prevented leasing of safety deposit boxes. Finding little ground to distinguish the result, the Sombrero court ultimately said the Cen-Fed claim was “for the diminution in value of its leasehold interest [as] a claim for economic loss, untethered to an interest in tangible property…. 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.” Plus, the Sombrero court pointed out that Cen-Fed had involved a purely contractual theory, with the jury limiting its award to a breach of lease claim and resulting economic damage, but making no award for loss of use of tangible property.

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Florida Department of Insurance Says Anybody Hired By a Licensed Public Adjuster Can Participate in Preparing an Insurance Claim By Writing the Insurance Estimates of Damage

Chip Merlin | Property Insurance Coverage Law Blog | October 18, 2018

The Florida Department of Financial Services (DFS) has issued an email authorizing Florida licensed public adjusters to hire anybody to make estimates of damage. This email corrects my latest two blogs which indicated that the OIR wanted to prevent those not licensed from working on insurance claims by determining valuations of loss and estimates of damage.

How one can write an estimate of a building, equipment or personal property loss without investigating the loss is beyond my understanding—but not beyond those running the Florida Department of Financial Services. The Florida DFS will allow any third party, including a person who has lost his or her license to work as a public adjuster, convicted felons, unlicensed contractors, contractors who may have lost their licenses, and unqualified people, to write estimates of damage. The only requirement is getting a public adjuster to hire them.

Here is the text of an email from the DFS in response to a public adjuster’s inquiry prompted by my prior two posts on this matter. He lists no qualifications for the third-party a public adjuster can hire to write an estimate for a first party insurance claim:

Hiring a third-party to prepare an estimate on your behalf would not be a violation, so long as that individual provides the estimate to you and does not does not otherwise solicit, adjust, investigate, or negotiate for or attempt to effect the settlement of a claim.

Thank you,

Jeffrey L. Young, MPA
Regional Administrator
Bureau of Investigation
Division of Insurance Agent & Agency Services

The impact of the Regional Administrator’s ruling cannot come at a better time for those who do not have public adjuster licenses and have no intention of obtaining one but are eager to start working on Florida insurance claims. They can make a deal with a public adjuster for a percentage of the settlement or of the estimate amount and provide those estimates to the public adjuster.

So, let’s look at the practical impact. Public adjusters who do not have enough in-house manpower or finances to hire or oversee licensed public adjuster estimators can simply hire third parties to make as many estimates as possible. Those public adjusters essentially turn their businesses into solicitation and negotiation businesses. They will give up a part of their fee but make a lot more money because they handle matters in volume.

For policyholders who are supposed to be protected by this regulatory scheme, this may not be so good. They will hire a licensed professional to assist in the claim, but the loss evaluation estimates can be done by a person who is not subject to the professional competence and integrity requirements that are required for the job. In sum, the DFS does not care who determines the amount of estimated loss so long as it is sent to the insurance company by the licensed public adjuster.

For all of you who were upset with me for explaining who could not write estimates for insurance claims in Florida, including those with criminal backgrounds, I apologize because I must have been mistaken. The law that I helped to draft is apparently not the law—at least according to those who are supposed to enforce it.

Obviously, I do not think this is best for policyholders. I have always suggested that the public adjustment trade should look at rules and regulations from the viewpoint of the policyholder—What is best for the policyholder even if it is not economically best for the public adjuster in the short term? The profession of public adjusting certainly took a step backwards with the Department’s view of the matter.

Idaho Denied or Delayed Property Damage Claims

Jonathan Bukowski | Property Insurance Coverage Law Blog | October 16, 2018

During the recent Summer 2018 RMAPIA Conference, Larry Bache and I had an opportunity to discuss regulations and remedies available to first party policyholders within the RMAPIA states. Continuing that discussion, this post will review the legal remedies available to Idaho policyholders enduring the frustration of a delayed or denied insurance claim. Fortunately, Idaho provides several remedies to assist policyholders in their efforts to recover insurance benefits due and owing under an insurance policy.

The typical scenario often involves the submission of an insurance claim following a destructive hail or wind storm. Despite gladly accepting premiums for the property, suddenly the insurance carrier refuses to provide benefits for repair of damaged property, forcing its insured to choose between accepting the denial or filing legal action for breach of the insurance contract. Idaho requires that a policyholder file its action for breach of contract within five years of the date of loss,1 and unlike several surrounding jurisdictions such as Wyoming and Colorado, Idaho does not allow an insurance carrier to shorten the five-year statute of limitation period.2

Idaho also provides the ability for policyholders to recover attorney fees in a lawsuit where a proof of loss is submitted and an insurer fails to pay the claim within thirty days.3 This is an important remedy where too often a policyholder cannot afford to the repair of the property, let alone the payment of attorney fees and costs to recover benefits due and owing under the policy.

While Idaho provides its policyholders with a potential recourse related to an insurance carrier’s mishandling of the claim, a policyholder must overcome several hurdles to prevail, including:

  • demonstration that the insurance carrier intentionally and unreasonably denied payment;
  • demonstration that the claim was not fairly debatable;
  • demonstration that the denial was not the result of a good faith mistake; AND
  • demonstration that the harm was not fully compensable by contract damages.

Finally, Idaho allows a policyholder to bring a claim for punitive damages where an insurance carrier has acted egregiously in the handling of the claim. While the claim cannot be made in the initial lawsuit, it can be asserted in a pretrial motion to amend where the policyholder can establish a reasonable likelihood of proving facts at trial sufficient to support an award of punitive damages.4 A policyholder must demonstrate by clear and convincing evidence, oppressive, fraudulent, wanton, malicious, or outrageous conduct of the insurance carrier in the handling of the claim.

If your Idaho property damage claim has been improperly denied or unreasonably delayed, consider speaking to an attorney experienced in handling property insurance claims to discuss the details of your claim and options available under the law.
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1 I.C. § 5–216.
2 I.C. § 29-110.
3 I.C. § 41-1839.
4 I.C. § 6–1604(2).

It’s Rain, Not Flood, Why Isn’t My Water Damage Covered?

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | October 13, 2018

The photos from Hurricane Michael show catastrophic loss from not only the storm surge, up to fourteen feet in some areas, but from winds and rain as well. For those that live far enough inland where surge and flood was not an issue, but still sustained water damage from rain, you may think your homeowners policy will cover you. There is however an exclusion in most policies, commonly called the “wind driven rain exclusion” that insurers will use to disclaim coverage.

The “wind driven rain” exclusion will exclude or limit water damage to the interior of a building unless the wind caused an opening in the envelope of the building, leading to an entry point for the water. Common policy language provides:

We will not pay for any loss that is a consequence of loss or damage as described and limited in this section…The interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driving by wind or not, unless the building or structure first sustains damage from a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.

Obviously, you’re not leaving your windows open during a large storm, so you may think it’s obvious that the water entered via damage from a covered cause of loss. The most common denial letter I see for water intrusion, once the above wind driven rain exclusion is cited, is one for lack of maintenance, or faulty workmanship. The insurance companies are agreeing to insure the loss if the building first sustains damage from a covered loss, then states there’s no way the major windstorm caused this damage, this was obviously from an: old roof, roof that had reached its life span, faulting seals/installation/old windows doors, poor workmanship upon original installation of windows/roof/doors, and my favorite—lack of maintenance. These reasons are generally not covered causes of loss under the policy, so the insurer adds these to the denial letter in order to deny coverage via wind driven rain exclusion.

As always, read your policy to know what types of damages you are insured against. If you’re making renovations or repairs to your home, keep records of what was done when, perhaps memorialize with photographs the finished product so if you are ever faced with a denial letter for ‘lack of maintenance’ you can show definitively the property was well maintained. And don’t be afraid to ask your agent what the coverages and exclusions mean in your policy.

Direct Physical Loss By Tenants Is Excluded Under Policy’s Dishonest or Criminal Acts Exclusion

Christina Phillips | Property Insurance Coverage Law Blog | October 2, 2018

Is loss or damage caused by a tenant covered under an all-risk insurance policy? Like most issues addressed in the Merlin blog posts, the answer is: it depends on the facts and the policy language.

The Sixth Circuit in KVG Properties, Inc. v. Westfield Ins. Co., 2018 WL 3978211 (6th Cir. Aug. 21, 2018) recently addressed this issue under a factual situation becoming more and more prevalent. Unbeknownst to KVG, it’s commercial tenants were growing marijuana in the property. Ultimately, the tenants were caught during a raid by the U.S. Drug Enforcement Agency. KVG immediately moved to evict the tenants and gain possession of the property. In its eviction proceedings KVG alleged that the tenants were “illegally growing marijuana.” The tenants were evicted and KVG obtained control of the property. However, the tenants had caused extensive damage to the property to accommodate their marijuana operations. The tenants had removed walls, changed duct work, cut holes in the roof, and severely damaged the HVAC systems. It was alleged the tenants had caused nearly $500,000 worth of damage.

KVG ultimately filed a claim against its insurer, Westfield. Westfield denied the claim based on the Dishonest or Criminal Acts Exclusion. In relevant part, the exclusion provides that Westfield will not pay for loss or damage caused by or resulting from any “[d]ishonest or criminal act by you, any of your partners, members, officers, managers employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”1 Summary judgment was granted for Westfield. KVG appealed.

On appeal, the Sixth Circuit concluded that the property had sustained physical damage, caused by some risk (or risks) of direct physical loss. The Sixth Circuit then turned to whether the loss and damage was excluded as a result of the Dishonest or Criminal Acts Exclusion. The court focused its inquiry on the core question of whether the tenants committed a criminal act within the meaning of the policy. Dismissing KVG’s argument that Westfield could not invoke the exclusion unless the tenants had been convicted of a crime, the Sixth Circuit affirmed the lower court’s grant of summary judgment. It found there was no dispute that the tenants were engaged in illegal, criminal conduct. In that regard, the Sixth Circuit noted that KVG admitted as much in its eviction proceedings when it stated that the “tenant illegally grew marijuana.” The appellate court also noted that the raid by the DEA was part of a criminal investigation. As such, the Sixth Circuit concluded that Westfield had proven that the Dishonest or Criminal Acts Exclusion applied to bar coverage.
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1 KVG did not argue and thus the Court did not address whether the exclusion should apply to someone who obtains “entrustment” by false pretenses.