Wildfire Claims and Coverage

• Publication year: 2022

Scott P. DeVries and Yosef Y. Itkin ^*

Abstract: Wildfires destroys millions of acres a year in the United States, spewing smoke across much of the nation. The cost of damage alone over the past several years soars into the hundreds of billions. When policyholders turn to their insurers many benefit from the coverage they wisely secured. But not all policyholders get the coverage they believe they paid for. When and how they present their claims is a critical factor. In this article, the authors strive to provide a comprehensive understanding of coverage risks, the regulatory landscape, and navigating the all-important claims process.

Introduction

Sparked by lightning storms, devastating wildfires claimed more than 10 million acres in 2020, releasing substantial amounts of smoke above the western United States. Accuweather founder and CEO Dr. Joel N. Myers called 2020 "the worst fire season in history," and estimated that the total damage and economic loss would be between $130 billion and $150 billion. ¹ And 2021 was not any better. According to the Insurance Information Institute, in 2021, while the hottest temperatures on record were recorded in California, Nevada, Oregon, Washington, and Arizona, and drought conditions reached an all-time high, the number of wildfires remained approximately the same (58,900) although the number of acres destroyed reduced to 7.1 million acres from the year before. ² Some of the wildfires were among the largest on record with the Bootleg Fire in Oregon destroying 400,000 acres and the Marshall Fire in Colorado causing an estimated $1 billion in losses.

Fortunately, many individuals and businesses are fully insured, and most insurance companies work with policyholders to process claims and help them rebuild and get them back up and running. However, it does not always work that way for every insured. While property insurance may cover much of the losses

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from wildfires and other catastrophic events, not every policyholder is made whole or anything approaching this. ³ And even for those that are fully insured, when and how to present a claim can materially affect how much they recover and when. This can be extraordinarily difficult at any time, but especially when a fire has destroyed everything.

This article is intended to provide an overarching and comprehensive understanding of the risks that may arise, the available coverages and the issues that may present, the emerging regulatory overlay and the claims process. While coverage terms may differ, pursuit of a cohesive strategy can facilitate what may be a complex and frustrating process. ⁴ In providing this analysis, it is important to underscore that the terms of the policy, as well as corresponding state law (both in construing contracts as well as any regulatory schemes), ultimately control and must be carefully considered.

Types of Wildfire-Related Loss

Wildfires take a devastating toll on individuals and businesses alike. Lives are upended. Physical structures are decimated. Contents are destroyed by fire and smoke. Businesses of all sorts are forced to close. Roads are closed, shutting down (or at least slowing down) interstate commerce and adversely affecting supply chains. As firefighters and others battle the fires at considerable personal risk, municipalities and innumerable others incur massive wildfire suppression costs. In addition to policyholders who themselves sustain loss, they may be liable to third parties who assert that policyholder actions caused them to sustain loss as well. ⁵ These are just a small number of the types of claims that can present.

Which Policies May Provide Coverage for Wildfire-Related Loss?

Homeowners are typically covered by a state approved and standard form fire insurance policy that specifies the minimum coverage that must be provided. As Justice Croskey explained in a leading California treatise on insurance litigation:

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States began regulating fire insurance policies in the 1800s. Later, the insurance industry began to expand the perils covered by a fire insurance policy. The first perils that were added related to the actual occurrence of a fire (smoke and water damage). Other perils, such as windstorm and hail, were later added. Eventually, fire and seven other perils became known as "fire and extended coverage." Competitive pressures caused the insurance industry to continue to expand the fire policy. Fire and 16 specified perils became known as "fire and additional extended coverage." ⁶

While wording may vary by state (and by insurer), the policies typically cover loss to the dwelling, other structures, personal property, and loss of use. The policies also may cover loss due to civil authority where, while the insured property itself may not have been damaged, there has been damage to other property.

Businesses often have similar forms of property coverage. They also frequently purchase business income coverage by which the insurer agrees to pay for lost business income associated with direct physical loss or damage caused by a covered event (here, the wildfire). These policies also may cover what is referred to as contingent business interruption, which provides coverage for losses arising from damage sustained by the businesses supply chain. Builders risk policies may cover property in the course of construction. And an array of coverage modifying endorsements are available on each.

Issues That May Affect the Nature and Extent of the Insurance Company's Obligation to Pay for Policyholder Losses

Coverage grants in fire insurance policies broadly provide coverage subject to the specified limits and sublimits. The typical policy covers "physical loss or damage" and it is generally understood that wildfires destroying the policyholder's property satisfy this requirement. Where this occurs, there is no issue that the wildfire is the "direct" cause of the loss. This is not to say, however, that insurers are obligated to pay the entire loss and we now turn to some of the issues that they raise.

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Fire Policies and Coverage for Smoke Damage

Some insurers argue that these policies are limited to fire damage to the insured property and do not include smoke damage associated with nearby fires. A treatise frequently cited by insurers states otherwise: "The concept that fire insurance covers non-fire damage which is the proximate result of fire finds application also when the fire occurs on other property and causes harm to the insured property. In such case, the harm to the insured property, even though it is a non-fire harm, has long been recognized to be the result of fire, and, therefore, within the policy coverage." ⁷

Case law is to like effect, finding that coverage for smoke loss exists under a commercial property policy that requires "physical loss or damage." For example, a policyholder suffered direct physical loss or damage where a theater had to cancel outside performances because of "poor air quality caused by the wildfire smoke." ⁸ There was no permanent damage; the performances were cancelled solely because of the poor air quality. The policyholder suffered "direct physical loss of or damage to" insured property because the smoke made the theater "uninhabitable" and "unusable for its intended purpose."

Certain businesses such as wineries and vineyards face unique challenges with respect to coverage for smoke loss. When smoke from nearby fires taints grapes, degrading their quality and decreasing their value, these businesses may seek coverage under property and business interruption policies. While insurers may acknowledge that property policies cover harvested grapes, the specific timing and location of the smoke taint can become an issue. ⁹ If smoke particles settle on the grapes while they are still in the field with the physical damage occurring before the grapes are harvested, coverage may also be available under the winery's crop insurance policy.

Business Interruption Claims, Causation, and Evacuation Orders

Often, the wildfire destroys the property and business operations cease until the property reasonably can be rebuilt and

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reopened. In this situation, insurers acknowledge that the fire has caused physical loss of or damage to insured property.

However, insurers may raise issues when the insured property is not itself damaged but cannot be used for its intended purpose, as was the case in the Sierra Nevada range in 2021 when the Candor wildfire was largely uncontained. Agencies may issue a mandatory evacuation order requiring businesses to close, causing them to incur substantial loss of business income. ¹⁰ While not arising in a wildfire context, insurers may argue that a recent California Court of Appeal decision in The Inns by the Sea v. California Mutual Ins. Co. permits them to avoid paying for these losses. ¹¹ Courts are unlikely to accept this argument, which, in addition to being counter to logic where the wildfire is the efficient proximate cause of the order, would conflict with long-standing California precedent providing that issues of causation should be decided by the trier of fact. ¹²

Interplay Between Coverage Grants and Exclusions and the Anti-Concurrent Cause Provision

Insurers may cite exclusions in an attempt to reduce or avoid liability. The insurance industry has long relied on the Insurance Services Office (ISO) to draft standard form policy language and secure approval as required by state regulatory agencies. ISO Form HO 00 03 10 00 (Section I—Exclusions, Part B) provides the following form exclusionary language:

We do not insure for loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not precluded by any other provision in this policy is covered.

1. Weather conditions. However, this exclusion only applies if weather conditions contribute in any way with a cause or event excluded in A. above

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