California Court Finds That Bad Cooking Odors Didn’t Result in Property Damage

An interesting issue came before the U.S. District Court for the Northern District of California recently. In Travelers Property Cas. Co. of America v. Mixt Greens, Inc., 2014 WL 1246686 (March 25, 2014), litigation was brought because the ventilation system in a commercial building where several restaurants did business resulted in offensive odors of cooking oil from one restaurant, Mixt Greens, being ventilated into a second restaurant, Murphy’s Deli.

The building owner and property manager were named as additional insureds under the Mixt Greens policies (primary and excess) issued by Travelers. The building owner and property manager tendered the defense of the lawsuit brought by Murphy’s Deli to Travelers.

The owner of Murphy’s Deli brought suit alleging that Mixt Greens had caused noxious fumes and offensive odors to permeate Murphy’s Deli’s space resulting in a loss of use of that space. As a result, Murphy’s Deli alleged loss of sales and loss of earnings and profits.

Travelers argued that the tendered lawsuit did not allege property damage as defined by the policy.

First, Travelers argued that the loss of customers did not constitute the “loss of use of tangible property” because Murphy’s Deli was never forced to close and because the only claimed “loss” was a loss of revenue because of a decline in customer patronage.

Travelers also argued that the loss of customers did not constitute the “loss of use of tangible property” because that phrase referred to things and not customers. The Court begged the question of whether people could constitute “tangible property.” Although the Court noted that, consistent with an insured’s reasonable expectations, the term “tangible property” also would refer to things that can be touched, seen and smelled. Therefore, “tangible property” was property “having physical substance apparent to the senses.” That could mean customers. The Court never resolved that issue directly.

The Court noted that under California law general liability policies did not cover pure economic losses such as those alleged by Murphy’s Deli. The Court then found that the reduction in profits due to the loss of customers because of fumes and odors did not constitute the “loss of use of tangible property.” The Court found there was no property damage as the term was defined in the policy. The only damages Murphy’s Deli sought from Mixt Greens in the underlying action were economic losses. The fact that Murphy’s Deli did not seek to recover the cost of repairing or replacing any tangible property, and that no part of its restaurant was ever closed because of the odors—not even for an hour—compelled the conclusion that the Murphy’s Deli losses, which were purely economic, were not covered under the policy and Travelers was not obligated to defend.

The result in Travelers v. Mixt Greens must be differentiated from the facts before the Court in Essex Ins. Co. v. Bloomsouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009).

In Essex, the defendant was a subcontractor hired to install carpet tiles in a Massachusetts office building. When the building’s occupants moved back in they noticed an unpleasant odor. The subcontractor replaced the carpet but it did not solve the odor problem. The general contractor spent in excess of $1.4 million for remediation efforts. The general contractor brought suit against the subcontractor. The insurance company declined coverage and refused to defend or indemnify either the general contractor or the subcontractor.

In Essex, the Court found a duty to defend existed because the complaint alleged “physical injury to tangible property” within the meaning of the policy. The Court found that an odor that permeates a building (as opposed to simply permeating the air) can constitute physical injury to tangible property. The odor in Essex had permeated the building necessitating the remediation which involved the removal of carpet, the blasting of the concrete floor, the replacement of the carpet and the installation of special carbon filters which the Court found sufficient to support a claim of physical injury to the building.

The takeaway from the Travelers v. Mixt Greens case is that where there is no physical injury to the building caused by the odor permeation and the only alleged loss is economic, the coverage determination will turn on what that particular jurisdiction’s jurisprudence is on whether pure economic losses are covered under general liability policies. Was the retail space shut down in order to remediate anything caused by the odor? If so, there could be a loss of use claim. However, the loss of customers only produces pure economic loss which would not be covered.