General Liability Insurer Forced to Pay Insured $1 Million For Revocation of Nightclub Permit


Three Sombrero, Inc. owned a commercial property in Colton, California that was used a nightclub known as “El Sombrero”. Sombrero contracted with a security service, CES, to keep weapons and firearms out of the that nightclub. CES allowed certain patrons to bypass the club’s metal detectors and use a “VIP” entrance.   It was through this “VIP” entrance that a nightclub patron smuggled a gun into El Sombrero, in June 2007, and fatally gunned-down a club-goer.     

As result of the fatal shooting, the City of Colton revoked El Sombrero’s permit to operate as a nightclub, only allowing it to operate as a banquet hall.  As a result, the property lost close to $1 million in resale and rental value.     

El Sombrero sued  the security service, CES.  It claimed that CES’ negligence caused the loss of its permit and the resulting drop in property value. El Sombrero obtained a default judgment from CES for $923,078 and then sued CES’s insurance company, Scottsdale Insurance Company, to collect the $923,078.   

CES’s liability policy with Scottsdale provided that Scottsdale would indemnify CES if CES employees accidentally caused the loss of use of another’s tangible property even though that property was not physically damaged.   

Scottsdale claimed that it was not liable because the loss of a permit did not constitute the loss of “tangible property.”

The Court of Appeals of California disagreed, ruling that  Sombrero’s right to use the property as a nightclub constituted  “tangible property,” and ordered Scottsdale to pay up.  

If your insurance company has denied your business claim or is giving your business a hard time during the claims process, do not hesitate to give us a call.


Evan S. Schwartz
Founder of Schwartz, Conroy & Hack