By Michael Dawe and Brian Cronin
Michael G. Dawe is a principal of Prenovost, Normandin, Bergh & Dawe and of counsel to Borchard & Callahan in Orange County.
Brian D. Cronin is an associate at Prenovost, Normandin, Bergh & Dawe and focuses on civil defense litigation and insurance coverage issues.
"Things are not always what they seem." The Fables of Phaedrus, Book IV, Fable 2.
Whether representing plaintiffs or defendants, every litigation professional needs at least a basic understanding of liability insurance coverage to avoid inevitable malpractice landmines in the pathways of a professional career. The holding in Thee Sombrero, Inc. v. Scottsdale Ins. Co. (2018) 28 Cal.App.5th 729 provides a clarifying prism through which the importance of a front-end insurance coverage analysis can be appreciated.
Important lessons to be learned from this case include: (1) the potential for liability insurance coverage is very often not obvious; (2) the apparent lack of insurance coverage is often supported by seemingly logical and sound, albeit incorrect, denials of coverage; and (3) a competent front-end and ongoing insurance coverage analysis is a critical element of discharging one's professional responsibility in civil litigation.
Thee Sombrero Inc. ("Sombrero") owned commercial property which was operated as a nightclub pursuant to a conditional use permit ("CUP") from the city of Colton, California. The CUP permitted a floor plan of the property that could not be modified without city approval. In 2007, Sombrero leased the property to tenants who operated the nightclub as "El Sombrero." The city approved a floor plan which had a single entrance equipped with a metal detector through which all patrons had to pass.
The operators of El Sombrero employed on-premises security services ("Security"). Security carried liability insurance covering it for both the customary "bodily injury" and "property damage" liability exposures. The liability coverage provided, in customary terms, that Security would be both defended against potentially covered claims, and indemnified against actually covered claims for "bodily injury" and "property damage" arising from an "occurrence." (There was no direct issue in this case of whether Scottsdale had a "duty to defend" its insured because Sombrero's claim focused solely on Scottsdale's alleged "duty to indemnify.") An "occurrence" was customarily defined as an "accident." In lay terms, Security's insurance provided it with the right to a legal defense and indemnity against claims that it had accidentally caused "bodily injury" or "property damage" to any third party.
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On June 4, 2007, one patron shot and killed another patron at the El Sombrero nightclub. As a result of this homicide, the city revoked Sombrero's CUP. While Sombrero was able to negotiate a modified CUP allowing it to operate as a banquet hall, it could no longer operate as a nightclub. According to the president of Sombrero, the change in legal status dramatically reduced the value of the property. Sombrero's president opined in a declaration that the fair market value of Sombrero's property as a nightclub was over $2,700,000, while its value as a banquet hall was just over $1,800,000, a reduction in value of over $900,000.
Assuming Sombrero's president arrived in your office seeking advice as to whether or not insurance coverage might play a role in compensating Sombrero for its loss of over...
