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The Importance of Contract Language: An Insurance Case

In California, courts will enforce contracts as they are written. Thus, the language used in the contracts is crucial if you want the contract to reflect your expectations. This is among the many reasons to hire a good San Diego corporate attorney to draft contracts you want to present and to review contracts that have been presented to you for signature. A recent California Court of Appeals cases gives a good example of the importance of contract language involving an insurance contract/policy. See Thee Sombrero, Inc. v. Scottsdale Co., Case No. E067505 (Cal. App. 4th Dist. October 25, 2018).

The case involved El Sombrero which was a nightclub in Colton, California, owned by Thee Sombrero, Inc. Thee Sombrero also owned the property where the nightclub was located. Thee Sombrero hired a security company called Crime Enforcement Services (“CES”) to provide security, but CES did not do a very good job. In 2007, there was a shooting at the club and several people were injured and one person died. Following the shooting, El Sombrero lost its conditional use permit and was no longer allowed to operate as a nightclub. El Sombrero was reduced to being a banquet hall.

In due course, Thee Sombrero sued CES for negligence and, as allowed by California law, also sued CES’s insurance company directly for the insurance coverage. As damages, Thee Sombrero claimed lost revenue and also lost value to its real estate — diminished value. Thee Sombrero claimed that it lost almost $1 million when the use permit was revoked and it was forced to operate only a banquet hall.

The insurance policy sold to CES by Scottsdale Insurance provided coverage for any “property damage” that resulted from “an occurrence” of negligence. Everyone in the case agreed that the shooting fit the definition of “occurrence.” The question in the case turned on the definition of “property damage.” The insurance contract/policy defined “property damage” as either

  • “Physical injury to tangible property, including all resulting loss of use of that property” and
  • “Loss of use of tangible property that is not physically injured”

The first definition did not apply since everyone agreed — and there was no evidence — that there was no physical damage to the property like if there had been a fire, for example.

The case then hinged on the second definition. Scottsdale made two key arguments. First, Scottsdale argued that there was no “loss of use” for the property since the property could still be used as a banquet hall. The California Court of Appeals rejected that argument saying that a significant loss of use is still a loss of use. For the court, the language used in the insurance contract controlled the outcome. If Scottsdale had wanted to avoid coverage, the language that should have been used was “total loss of use …”

Scottsdale also argued that they did not have to pay under the insurance policy because there was only economic loss and no damage to the property itself. The court agreed that, normally, such would be true. Normally, losses that are exclusively economic do not meet the definition of “property damage” in normal use. However, once again, the court reached the opposition conclusion because of the language used in the contract. The contract — as quoted above — expressed defined “property damage” to include loss of tangible property “… that is not physically injured.” As such, the purely economic losses claimed by Thee Sombrero were covered under the policy language. To accomplish a different result, the contract should have used different language.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. As can be seen, the language used in a contract is important. Mr. Leonard was recently named as “Best of the Bar” by the San Diego Business Journal for 2018. Mr. Leonard has received that honor for the past four years. Mr. Leonard can be reached at (858) 483-9200 or via email.

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