Claim For Replacement Value Of Stolen Money Not Covered Under CGL Policy

By Rebecca Aherne

On December 10, 2010, the Fourth Appellate District filed its opinion in Advanced Network, Inc. v. Peerless Insurance Company holding that an action for the replacement of cash stolen by an employee of the insured was not a claim for damages for the loss of use of property within the meaning of the CGL policy issued to the insured, and thus, the insurer had no duty to defend or indemnify the insured.

Factual and Procedural Background

Advanced Network, Inc. (ANI) contracted with a credit union to service its cash distribution machines.  It was subsequently discovered that one of ANI’s employees had stolen approximately $2 million in cash from the credit union.  The credit union made a demand on its bond holder, Cumis Insurance Society, which paid the claim.  Cumis sought reimbursement from ANI.  ANI tendered the defense of the claim to its CGL carrier Peerless.  The Peerless policy covered third party property damage caused by an occurrence during the policy period.  Property damage was defined as “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.”  Peerless denied the claim, and ANI brought this action against Peerless for breach of contract and breach of the implied duty of good faith and fair dealing.  The trial court found in favor of ANI on its breach of contract cause of action.  The bad faith claim was submitted to the jury which awarded attorney fees and punitive damages to ANI.  The appellate court reversed the judgment of the trial court.

Judicial Holding and Analysis

The trial court erred by finding coverage under the Peerless policy on the ground the underlying action was for loss of use of the cash ANI’s employee stole from the credit union.  Under California law, the term “loss of use” cannot reasonably be interpreted to include the permanent loss of property through conversion.  The terms “loss” and “loss of use” are not interchangeable for insurance purposes.  “Loss of use” is narrower than “loss” of property.  Loss of use is intended to compensate for a temporary loss and is thereby determined by rental value while loss of property is intended to compensate for a permanent loss and is determined by replacement cost.  Coverage for “loss of use” does not apply to an underlying action in which the claimant seeks only the replacement value of converted property.  While the “loss of use” provision is not modified by the term “temporary,” the impermanent nature of “loss of use” damages is implicit.  The measure of damages of stolen property cannot be its rental value ad infinitum on the ground there was a permanent “loss of use” of the property.  Interpreting the term “loss of use” to include a permanent loss would lead to absurd results.  The stolen cash was irretrievable.  The underlying action was for the replacement value of the cash, and did not seek any “loss of use” damages.

Comments and Implications

In reaching its decision, the court relied primarily on Collin v. American Empire Insurance Company (1994) 21 Cal App 4th 787, wherein it was held the conversion of furniture was not property damage under the “loss of use” provision.  Collin explained that “loss of use” is different than “loss” of property, stating:  “assume that an automobile is stolen from its owner.  The value of the ‘loss of use’ of the car is the rental value of a substitute vehicle; the value of the ‘loss’ of the car is its replacement cost.  The nature of ‘loss of use’ damages is described in California Jurisprudence Third as: ‘The measure of damages for the loss of use of personal property may be determined with reference to the rental value of similar property which the plaintiff can hire for use during the period when he is deprived of the use of his own property.’”  The insureds in Collin did not lose the use of their property.  The damages they recovered were not “loss of use” damages, but the value of the property itself.

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