Insurers often claim “economic damages” are not covered under a standard commercial general liability (CGL) policy. The Fourth District Court of Appeal’s decision in Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729, 736 (2018) review and request to depublish denied (Jan. 30, 2019), demonstrates that “loss of use” can be measured by “economic damages”—i.e., loss in profit or diminution in value—so long as they are tied to a property interest.

In Thee Sombrero, Inc., the insured’s negligent security services resulted in the revocation of Thee Sombrero’s permit to use its property as a night club after a patron was allowed to enter without passing through the metal detector, resulting in a fatal shooting. Thee Sombrero sued the security company, and obtained a default judgment. Thee Sombrero then pursued Scottsdale to satisfy the judgment. The trial court found in favor of Scottsdale, but the Court of Appeal reversed, finding that “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.” Id.
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Are you Covered? note pinned to boardThis is part one of a two-part series looking at how court decisions in recent years have thwarted general contractors’ reasonable expectation of coverage under their general liability policies.

In early March, the Ninth Circuit Court of Appeals issued an unpublished opinion in Archer Western Contractors v. National Union, No. 15-55648 (filed Mar. 2 2017). The opinion held that the phrase “that particular part” as used in the “Damage to Property” exclusions in a CGL policy must be interpreted broadly to encompass “the entire project on which a general contractor is performing operations.” This is not the first time the Ninth Circuit has issued an unpublished opinion interpreting “that particular part” to apply to the entirety of a project.

The Ninth Circuit in these cases ignored the plain meaning of words that the insurance industry itself has explained should be construed in the narrowest possible sense. Policyholders, particularly general contractors, should beware this worrisome trend in the courts, as it is creating the potential for a gap in ongoing operations coverage that was not meant to exist.
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