Loss of Use can be “Property Damage” under Insurance Policies

Kevin Brodehl | Money & Dirt | February 10, 2019

General liability insurance policies normally cover “property damage.”  Physical injury to, or outright destruction of, property almost always fits within policy coverage.

But what about situations when the property is not physically injured at all, but the owner has lost important use rights associated with the property, such as the loss or alteration of a conditional use permit?

It all depends on the specific language in the insurance policy, as illustrated by a Court of Appeal opinion recently published by California’s Fourth Appellate District — Thee Sombrero, Inc. v. Scottsdale Insurance Company.

Background: insurance policy covers “loss of use;” property loses conditional use permit

Thee Sombrero, Inc. (Sombrero) owned commercial property in Colton, California.

The city issued a conditional use permit (CUP) authorizing the use of the property as a nightclub.  The CUP required city approval for the nightclub’s floor plan, and no modifications to the floor plan were allowed without city approval.

Sombrero’s tenant operated the nightclub.  Under the city-approved floor plan, the club had a single entrance door, equipped with a metal detector.

Crime Enforcement Services (CES) provided security services for the club.  CES obtained a corporate general liability policy from Scottsdale Insurance Company (Scottsdale).  The policy covered CES’s liability for “property damage,” which was defined as either “physical injury” to the property or “loss of use” of property that is not physically injured.

On June 4, 2007, one patron of the nightclub shot and killed another.  Investigation discovered that CES had created a second entrance to the club — a “VIP entrance” — that lacked a metal detector, and that the gun used in the killing got into the club through the VIP entrance.

The city revoked the CUP.  Sombrero eventually obtained a modified CUP allowing the property to be used as a banquet hall instead of a nightclub.

Sombrero sued CES for breach of contract and negligence, and obtained a default judgment in its favor for $923,078 — damages representing the diminution in value suffered by the property due to the lost CUP.

Sombrero then filed a direct action against Scottsdale under Insurance Code section 11580(b)(2) for breach of the insurance policy.

Trial court’s ruling: summary judgment granted for insurer

Scottsdale filed a motion for summary judgment, which the trial court granted.

The trial court held that Sombrero was essentially suing for “economic loss,” which was not the same thing as “lost use.”  Because the policy excluded coverage for mere economic loss, Scottsdale could not be liable, and the court entered judgment in Scottsdale’s favor.

Court of Appeal’s Opinion: insurer is on the hook

The Court of Appeal reversed the trial court’s judgment.

Looking to the language of the insurance policy, the court observed: “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.”

Sombrero did not simply lose the CUP, as Scottsdale contended.  The court noted that “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.”  Here, the revocation of the CUP meant that Sombrero could no longer use the property as a nightclub.

The court also rejected Scottsdale’s argument that a “total loss of all uses” would be required to trigger coverage.  The court held “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.”

The court acknowledged that strictly economic losses like lost profits, loss of goodwill, and investment losses typically are not covered by a comprehensive general liability policy.  Losses that are “exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”

But, those same items may be recovered from the insurer if they provide a measure of damages for a covered claim.  Here, diminution in value was an appropriate measure of damages for harm caused by the covered loss of use — the lost CUP.

Finally, the court emphasized that the language of the insurance policy will usually determine the outcome.  Where an insurance policy defines “property damage” more narrowly as “physical injury to or destruction of tangible property, including loss of its use,” the policy would not cover the loss of use of property that has not been physically damaged.


“Loss of use” can sometimes be covered as “property damage” under general insurance liability policies.  But it all depends on how the policy language defines “property damage.”

While strictly economic losses are generally not recoverable, economic losses may be recoverable if they provide a measure of damages for property damage that is covered by the insurance policy.

Ohio Supreme Court Bucks Recent Trend and Holds No Coverage for Construction Defects Under Commercial General Liability Policy

Heather Howell Wright | Bradley | December 2018

The insurance coverage analysis under a commercial general liability (“CGL”) insurance policy begins with the “insuring agreement.” The standard CGL policy provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The standard CGL policy further provides that the property damage must be caused by an “occurrence,” which is in turn defined as “an accident.” Traditionally, courts had held that a construction defect was not an “accident,” and thus losses associated with such defects or faulty workmanship were not covered under a CGL policy. However, the recent trend has been for courts to find that construction defects or faulty workmanship do satisfy the “occurrence” and “property damage” requirements for CGL coverage. Yet, a recent decision out of Ohio bucks this trend of finding that claims of faulty workmanship may be covered under a CGL policy.

In Ohio N. Univ. v. Charles Constr. Servs. Inc., the Ohio Supreme Court recently held that construction defects do not constitute an occurrence under a standard-form CGL policy, and that an insurer has no obligation to defend or indemnify claims for defective work. The underlying claim in this case involved a contract between Ohio Northern University (“Owner”) and Charles Construction Services, Inc. (“Contractor”) to build a new conference center and hotel. After the project was complete, Owner discovered extensive water damage and structural defects. Owner filed suit against Contractor, which in turn filed third-party claims against its subcontractors. Contractor tendered the defense to its insurer, Cincinnati Insurance Company (“Cincinnati”), which intervened and sought a declaration that it had no duty to defend or indemnify Contractor.

In the trial court, Cincinnati filed a motion for summary judgment on the declaratory judgment claim and asserted that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” The trial court granted Cincinnati’s motion for summary judgment, finding there was no duty to defend or indemnify for faulty workmanship.

On appeal, the Ohio Supreme Court considered the CGL policy definition of “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” The court opined that an accident was unexpected or unintended – involving fortuity. Because a subcontractor’s faulty work is not fortuitous, it could not satisfy the “occurrence” requirement in the CGL.

Importantly, the Ohio Supreme Court recognized that its decision conflicted with decisions in other states as well as the trend of finding coverage for construction defects – but the court explained that “[r]egardless of any trend in the law,” it was required to interpret the plain and unambiguous language of the policy. The court also noted that the Arkansas legislature had enacted a statute requiring that a CGL policy sold in Arkansas must define “occurrence” as including “property damage resulting from improper workmanship.” The Ohio N. Univ. Court noted that the Ohio General Assembly could pass similar legislation in response to the decision.

While the recent trend across the country has been for courts to find that construction defects may be covered under a CGL policy, this case may indicate a pendulum swing in the other direction. Even if it proves to be an outlier, it highlights the importance of knowing which law will apply to the interpretation of insurance policies, because the law can vary significantly from one jurisdiction to another.

Recovering Consequential Damages Under General Liability Policies

Charles P. Edwards and Alexandra Robinson French | Barnes & Thornburg | January 14, 2019

An often-overlooked feature of commercial general liability (CGL) policies is that they provide coverage for damages the insured is legally obligated to pay “because of” bodily injury or property damage. Most courts interpret “because of” broadly to include consequential damages and other damages that, while not themselves property damage, are traceable to covered property damage. While consequential damages are less likely to result from bodily injury, the scope of coverage is the same.

The rule that the standard CGL language providing coverage for damages “because of” property damage includes consequential damages having a causal connection to covered property damage is followed by the majority of courts that have considered the question. As one commentator has noted, “‘Because of’ can, and should, be read to mean: as a consequence of, on account of, or arising from. Certainly, this is the ordinary and usual meaning of ‘because of.’” Scott C. Turner, Insurance Coverage of Construction Disputes § 6:22 (2d ed.).

In Am. Home Assur. Co. v. Libbey-Owens-Ford Co., 786 F.2d 22 (1st Cir. 1986), for example, the court addressed the scope of coverage for damages arising from defective windows installed in the John Hancock office building in Boston. The need to replace the windows resulted in various increased construction and operating costs and delayed the occupancy date from April 1, 1973, to June 1, 1975. Hancock sued the window manufacturer, Libbey-Owens-Ford Company (LOF), and others to recover these damages, which included approximately $11 million for the costs of removing and replacing the windows and an additional approximately $88 million of consequential damages.

The First Circuit held that one reasonable interpretation of the “because of” language is that it “provides coverage not only for property damage, but also for consequential damages resulting from property damage.” Id. at 26. The court further noted that, although the policy would expressly exclude coverage for the $11 million in costs associated with the repair and replacement of LOF’s own product, the policy did not exclude Hancock’s consequential losses resulting from the breakage of LOF’s windows. Id. at 27. Accordingly, the court held, “[g]iven that American Home’s current policy is at best ambiguous, and at worst clearly applicable to cover LOF’s damages, we hold that the policy covers consequential losses stemming from physical injury to LOF’s products.” Id. at 28.

The First Circuit also cautioned the insurance industry that “an insurance company wishing to exclude consequential damages should use specific language to that effect.” Id. at 26. This caution was issued more than 30 years ago, and the “because of” language continues to appear on CGL policies without any specific exclusion for consequential damages.

While the “because of” language is form language found in the vast majority of CGL policies, some states have interpreted the language more broadly than others. In some states, the case law is not necessarily uniform. In California, for example, insurance companies often cite cases narrowly construing the language. But in AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 814 (1990), the California Supreme Court held that CGL policies cover the costs of reimbursing government agencies and complying with injunctions ordering cleanup under CERCLA, the Superfund statute, and similar statutes. In rejecting the argument that these economic costs were not “because of…property damage,” the court held that, “the event precipitating their legal action is contamination of property. The costs that result from such action are therefore incurred ‘because of’ property damage.” Id. at 842. A California Court of Appeals recently followed AIU in holding that certain delay damages were covered, holding that the “delay constitutes a consequential loss (a loss occasioned by the water intrusion) and as such, is part of the damages NAC must pay ‘because of’ property damage.” Global Modular, Inc. v. Kadena Pac., Inc., 15 Cal. App. 5th 127, 145, review den. (Dec. 13, 2017).

Most of the California confusion stems from reliance on pre-1973 cases. In 1973, the definition of “property damage” in standard CGL language issued by the Insurance Services Office (ISO) was revised to specifically include “loss of use of tangible property which has not been physically injured.” The prior language had defined property damage as “physical injury to or destruction of tangible property, including loss of its use.” See Gunderson v. Fire Ins. Exch., 37 Cal. App. 4th 1106, 1115 (1995). Several courts had held that under this earlier language, the loss of use referred only to property that was physically injured or destroyed. Id. The 1973 revision makes it clear that the loss of use of property which has not been physically injured also qualifies as property damage.

The California Court of Appeals recently clarified confusion in Thee Sombrero, Inc. v. Scottsdale Ins. Co., 2018 WL 5292072 (Cal. Ct. App. Oct. 25, 2018). The case involved a nightclub called El Sombrero that had its use permit modified after a fatal shooting so that it could be operated only as a banquet hall. The owner sued its security service (CES) alleging that its negligence in allowing the shooting had caused economic damages to the club, including a diminution in the value of the club associated with the modified use permit. After obtaining a default judgment in the amount of the diminished value of the club, the club owner sued CES’s liability insurer (Scottsdale) for indemnity. The trial court granted summary judgment for Scottsdale, holding that the club’s claims were “for an economic loss, rather than for ‘property damage’ as defined in and covered under the policy.” Id., at *2.

The California Court of Appeals reversed, holding that the club’s loss of use as a nightclub constituted property damage and that the resulting diminished value of the club qualified as damages “because of” that property damage. The court went so far as to hold that it “defies common sense to argue otherwise.” Id., at *8. The court specifically distinguished the earlier California cases interpreting the older definition of property damage. Id., at *15-16.

Courts also have found coverage for economic losses that arise “because of” bodily injury. In Cincinnati Ins. Co. v. H. D. Smith, L.L.C., 829 F.3d 771, 774 (7th Cir. 2016), for example, the court addressed coverage for an underlying claim brought by the state of West Virginia against drug distributors for costs incurred by the state as a result of its citizens’ addiction to drugs supplied by those companies. Id. at 773. The question presented was whether the costs incurred by West Virginia were “because of” bodily injury. Id. at 774-75. The court held they were. Id.

The court based its holding on its recognition that a CGL policy “cover[ing] suits seeking damages ‘because of bodily injury’…provides broader coverage than one that covers only damages ‘for bodily injury.’” Id. at 774 (original emphasis). The court illustrated the breadth of “because of” in the language at issue by giving the following example:

[A]n individual has automobile insurance; the insured individual caused an accident in which another individual became paralyzed; the paralyzed individual sues the insured driver only for the cost of making his house wheelchair accessible, not for his physical injuries. If the insured driver had a policy that only covered damages “for bodily injury” it would be reasonable to conclude that the damages sought in the example do not fall within the insurer’s duty. However, if the insurance contract provides for damages “because of bodily injury” then the insurer would have a duty to defend and indemnify in this situation.

Id. (quoting Medmarc Cas. Ins. Co. v. Avent Am., Inc., 612 F.3d 607, 616 (7th Cir. 2010)).

The types of consequential damages courts have held are covered by the standard “because of” language in CGL policies are various and extensive.

The Turner treatise, for example, lists the following:

Construction delay and loss of use, liquidated damages for delay, construction impact (i.e., loss of worker efficiency in performing construction work), relocation and storage costs; temporary repairs, diminution in the value of property, later resulting physical injury to other tangible property, the cost to remove and reinstall (or replace) good work in order to access the property damage (often called “rip and tear” damage), the additional repair and reconstruction costs required to bring the building into compliance with the current building code, loss or reduction of production, lost rents, lost profits, increased overhead, environmental response costs under CERCLA and similar statutes, costs incurred for mitigation or prevention of further property damage or bodily injuries, investigation and inspection costs, costs for clean-up and debris removal, costs of notifying adversely affected parties, the insured’s indemnity obligations to others (such as to the insured’s surety on a performance bond), loss of good will or damage to reputation, and emotional distress… 

Turner, § 6:22.

The few courts that have upheld denials of coverage for consequential damages have often confused whether the claimed damages constituted property damage, with the operative question of whether the damages were because of property damage. See, e.g., Kvaerner  N. Am. Constr. Inc. v. Certain Underwriters at Lloyd’s London Subscribing to Policy No. 509/DL486507, 2017 WL 2821691, at *9 (N.D.W. Va. June 28, 2017) (“liquidated damages still must fall under the CGL policy’s property  damage definition”); St. Paul Fire & Marine Ins. Co. v. Amsoil, Inc., 51 F. App’x 602, 604 (8th Cir. 2002) (“economic loss which is not ‘property damage’ is not covered under a CGL policy”); Essex Ins. Co. v. Chem. Formula, LLP, No. 1:CV-05-0364, 2006 WL 5720284, *6 (M.D. Pa. Apr. 7, 2006) (“loss of profits, damage to commercial reputation, and loss of goodwill are not tangible property damage as defined by the policy”). Insurers often adopt this erroneous position in refusing to cover consequential damages.

The Ninth Circuit recently held that an award of attorneys’ fees to the prevailing plaintiff in an underlying lawsuit against a policyholder is covered under thepolicyholder’s CGL policy. Ass’n of Apartment Owners of Moorings, Inc. v. Dongbu Ins. Co., 731 F. App’x 713 (9th Cir. 2018) (construing Hawaii law). The court held that “in the context of the policy, the plain meaning of ‘damages’ encompasses the fees the Bradens incurred to vindicate their claim for water damage to their home, even if those fees are not a measure of that physical damage.” Id. The court also held that the attorney fee award was “because of” the covered property damage, holding “[t]his phrase, which is undefined, connotes a non-exacting causation requirement whereby any award of damages that flows from covered property damage is covered, unless otherwise excluded.” Id. Note, however, that other courts have concluded that an award of attorneys’ fees against the policyholder constitutes “costs” falling within an insurer’s defense obligation, rather than “damages” falling within its indemnity obligation. See, e.g., Prichard v. Liberty Mutual Ins. Co., 84 Cal. App. 4th 890, 911-912 (2000) (attorneys’ fees awarded against the policyholder fall within the scope of a carrier’s supplementary payments obligation because they are statutorily defined in California as costs, and therefore are not “damages” within the meaning of a CGL policy).

One issue that has not been extensively litigated is whether the determination of what damages are “because of” bodily injury or property damage is a question for the court as a matter of law, or one for the court or jury in its role as the fact-finder. The scope of an insurance company’s indemnity obligation (as opposed to its duty to defend, which is broader) often is dependent on the outcome of the underlying case. See, e.g., United Nat’l Ins. Co. v. Dunbar & Sullivan Dredging Co., 953 F.2d 334, 338 (7th Cir. 1992) (“[T]he duty to indemnify must await resolution of the underlying suits.”); Westfield Ins. Co. v. Sheehan Const. Co., 575 F. Supp. 2d 956, 960 (S.D. Ind. 2006) (“The Plaintiff’s duty to indemnify will depend upon the facts and outcome of the underlying Indiana state court action.”) Yet many courts deciding the coverage issue also have decided what damages they deem to be “because of” bodily injury or property damage, rather than leaving that issue for determination in the underlying case.

A recent case from Texas, however, separates the legal question of the meaning of “because of” from the factual question of what damages were “because of” bodily injury or property damage. See Kenyon Int’l. Emergency Srvs., Inc. v. Starr Indem. & Liab. Co., 2018 WL 3431853, at *1 (Tex. App. July 17, 2018). The case involved coverage for emergency services performed by Kenyon for Seaport Airlines after the crash of a Seaport plane, which included setting up a call center, providing first responders and mental health staff, and establishing a welfare support line. Seaport’s aviation policy issued by Starr provided coverage for all sums that the insured shall become legally obligated to pay as damages “because of” bodily injury or property damage. After Seaport went bankrupt and failed to pay Kenyon for the services Kenyon performed after the crash, Kenyon sued Starr seeking a declaratory judgment that Starr’s policy covered the services and recovery in equitable subrogation.

The court first held that, “[v]iewed in the light most favorable to Kenyon, at least some of the damages Kenyon seeks may include sums Seaport became legally obligated to pay because of bodily injury,” and, therefore, covered by the policy. Id. at *4. The court then held that “a fact issue [exists] as to whether the reason at least some of the post-crash emergency services were performed – and potentially had to be performed – was bodily injury sustained in the plane crash, or any and all claims related to bodily injury.” Id. The court reversed the trial court’s summary judgment for Starr and remanded for further proceedings, presumably a trial, on the question of which of the damages sought by Kenyon were “because of” bodily injury. Id.

Policyholders should consider it a best practice to scrutinize any argument by an insurance company that consequential damages are not covered because they are not bodily injury or property damage. Where those damages arise “because of” covered bodily injury or property damage, they may well be covered.

Florida Federal Court Finds Insurer Must Defend Contractor in Defective Condo Construction Suit

Michael S. Levine | Hunton Andrews Kurth LLP | December 27, 2018

The United States District Court for the Middle District of Florida recently granted summary judgment in favor of developer, KB Homes, ruling that Southern Owners Insurance Co. must defend KB Homes under various Commercial General Liability policies.

The action arises from the construction of the Willowbrook Condominium project, a 51-building, 270-unit condominium project located in Manatee County Florida. Gallo Building Services, Inc., a subcontractor, entered into a master subcontract with KB Home, the developer and contractor for the project. Following the completion of the project, the association retained an engineering firm who discovered several defects at the project. The association sued KB, which then sued multiple subcontractors, including Gallo, forming the underlying litigation.

Southern, Gallo’s insurer, then filed the coverage action seeking a declaration that it had no duty to defend or indemnify Gallo under its policies of insurance. After Gallo became insolvent, KB Home stepped in and moved for summary judgment on the duty to defend.

Southern opposed the motion, arguing that the “your work” exclusion and the Exterior Finishing and Stucco Exclusion barred coverage, and that the association’s underlying complaint failed to allege property damage. The Court rejected Southern’s arguments and held that the Southern’s duty to defend was triggered by the broad allegations of “damage to other building components,” “damage to other property,” “water intrusion,” and relocation of resident,” which encompassed damage besides the work completed by Gallo. Moreover, the Court rejected the application of the Exterior Finishing and Stucco Exclusion stating that “Southern does not describe how each defect relates to stucco or an exterior finishing system,” therefore, determining the exclusions did not do away with Sothern’s duty to defend.

Not only is the decision a substantive win for policyholders, the decision provides a firm example of the value that can be obtained from other people’s insurance. By obtaining insurance from Gallo’s insurers instead of its own, not only did KB Home secure a complete defense in the litigation, it did so without implicating coverage under its own insurance and potentially impairing its own policy limits and without impacting its own loss ratios. Policyholders should therefore consider all potentially applicable insurance and indemnity agreements when faced with a claim or potential liability.

Wildfire Considered One Occurrence Despite Damaging Numerous Properties

Christina Phillips | Property Insurance Coverage Law Blog | November 29, 2018

A recent decision by the Supreme Court of Wisconsin1 might predict how other courts would analyze coverage under commercial general liability insurance policies for wildfires. In May 2013, a fire broke out on forest land owned by Lyme St. Croix Forest Company. The fire burned nearly 7,500 acres over the course of three days and damaged real and personal property owned by various individuals and businesses.

The fire was alleged to have begun within a piece of logging equipment owned by Ray Duerr Logging, LLC (“Duerr”). At the time of the fire, Duerr was insured by Secura under a commercial general liability policy with a $2 million aggregate limitation. The policy also contained a logging endorsement, the per-occurrence limit was reduced to $500,000 for property damage due to fire arising from logging or lumbering operations. Secura believed that the $500,000 policy limit applied, rather than the $2 million aggregate limit and filed a declaratory judgment action.

The Supreme Court of Wisconsin was presented with determining whether the fire was a single occurrence for purposes of the CGL policy, or whether there was a new occurrence each time the fire crossed a property line. The court began by looking at the policy language, which defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court then looked to the “cause theory” which provides “where a single uninterrupted cause results in all of the injuries and damage, there is but one ‘accident’ or ‘occurrence.’ ” If the cause and results are so simultaneous or closely linked in time and space as to be considered by the average person as one event, then only a single event has taken place.

In concluding that the fire was a single occurrence, the court noted that the fire burned continuously for three uninterrupted days in a discrete area caused by a single precipitating event. The court believed that the average person would consider this one event regardless of how many properties lines the fire crossed. In that regard, the Supreme Court of Wisconsin believed that the number of properties damaged by the fire was irrelevant – whether one person, or multiple persons owned the 7,500 acres did not determine the number of occurrences.

Additionally, the Wisconsin Supreme Court disagreed with the court of appeals determination that there was an occurrence each time the fire – fueled and expanded by the consumption of new materials – spread to a new piece of real property and caused damage. The Wisconsin Supreme Court held that such a conclusion would result in an unfathomably large number of occurrences, an interpretation which would cause an unreasonable result under the policy. As such, the Wisconsin Supreme Court concluded there was a single occurrence, subject to the $500,000 policy limit.
1 Secura Ins. v. Lyme St. Croix Forest Co., LLC, 918 N.W. 2d 885 (WI. Oct. 30, 2018).