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California Wildfires - Underwriting Considerations

November 1, 2021

By José M. Umbert, Ron H. Burnovski and Thomas J. D'Antonio

To read this article in PDF format, please click here.

Wildfires in California are, unfortunately, burning as frequently and as ferociously as ever. Exemplified by the 2017,[1] 2018,[2] and 2020[3] wildfire seasons, the number of wildfires in the last 5 years stands at a staggering 85,028 in the state of California alone. In fact, since 2000, there has been an average of 8,304 wildfires per year in California, burning an estimated 928,245 acres every year. These wildfires wreak havoc on California’s communities, affecting both residential and commercial properties. These wildfires also present unique challenges to both liability and property insurers that insure risk within the state. This article identifies some of these challenges and presents insurance industry underwriters with strategies for approaching these challenges.

Efficient Proximate Cause

Where two or more causes of loss contribute to claimed damage in first-party property claims, California applies the “efficient proximate cause” doctrine in analyzing coverage.[4] Under this doctrine, damage is covered (subject to policy terms) if a covered peril (e.g., third-party negligence) is the “efficient proximate cause” of the loss even if an excluded peril (e.g., soil subsidence) may have contributed to the loss.[5] Conversely, if the “efficient proximate cause” of the loss is excluded, there is no coverage. For the efficient proximate cause standard to apply, there must be two separate or distinct perils, each of which could have occurred independently of the other to cause the loss for which coverage is sought (even if they did not in fact operate independently).[6]

In the context of California wildfire losses, California’s efficient proximate cause doctrine can play a significant role in the overall causation determination and, in turn, have significant coverage impact. Generally speaking, even if an excluded peril, such as a mudslide, contributes to a loss, if the predominant cause of the loss is a covered peril, such as a fire, then the policy may provide coverage for the entire loss, including the loss caused by an otherwise excluded peril following the predominant cause of loss.

Keeping this in mind, insurers writing coverage in California should be mindful that there are limitations on their ability to “contract around” California’s efficient proximate cause doctrine by including different causation language.  For example, clauses excluding coverage for loss “caused directly or indirectly” by excluded perils “regardless of any other cause or event contributing concurrently or in any sequence to the loss” (i.e., anti-concurrent causation language) are unenforceable under California law.[7] Of course, insurers may issue policies that provide for the application of a causation standard that is more favorable to the insured than the efficient proximate cause doctrine.[8]

Prudent underwriters should keep the doctrine of efficient proximate cause in mind when placing coverage for properties in California as the doctrine may have application in the context of wildfire losses.

Wildfire Exclusions

Property insurance policies insuring California properties are increasingly including wildfire exclusions.[9]  When these exclusions are included in policies, underwriters should remember several key aspects of California law. In California, insurance policies are subject to the rules of construction governing contracts.[10] Courts will “construe policy language according to the mutual intentions of the parties and its ‘plain and ordinary’ meaning[.]”[11] Where there is an ambiguity in policy language, it will be “resolved…in favor of coverage.”[12]

When evaluating whether or not a contract is ambiguous, “the language of a contract is to govern its interpretation, if the language is clear and explicit and does not involve an absurdity.”[13] California courts have held that an exclusionary clause “must be conspicuous, plain and clear.”[14]  But California courts will hold the insured bound by clear and conspicuous exclusions  in its policy even if evidence suggests that the insured did not read or understand them.[15]

Policies that exclude damage as a result of wildfire, therefore, must be written in a “conspicuous, plain and clear” manner.  Those exclusions that are clear and explicit will be interpreted by the courts as controlling.

Additionally, California Governor Gavin Newsom recently signed AB 2756.  That new law provides that insurance companies must inform consumers in writing if the policyholder purchases a policy that does not cover the peril of fire or if the insurance company removes the peril of fire when the policy is renewed.[16]

Underwriters should keep these points in mind when drafting wildfire exclusions applicable to California properties.

The Potential For Strict Liability

The subject of wildfires and wildfire losses is of particular importance for underwriters of liability policies to insureds in California.

California utility companies have been inextricably linked to wildfires in recent years. For example, energy titan Pacific Gas & Electric (“PG&E”) admitted the 2018 Camp Fire, the state’s deadliest and most destructive wildfire, was caused by its faulty equipment.[17] Additionally, PG&E was found to have caused 12 wildfires in both Napa and Sonoma Counties in October of 2017 that destroyed thousands of structures, burned hundreds of square miles, and killed 18 people.[18] These are just two examples from recent years of the relationship between utility companies and wildfires in California.  Under the theory of inverse condemnation, private companies providing a public utility (e.g., electric companies) may be liable for takings that occur during the provision of those services. California law addressing “inverse condemnation” is an important consideration for insurers in the wildfire context because if they are issuing policies for private companies that provide public utilities, such as power companies, they may be liable for damage arising out of wildfires, even if caused by unintentional acts or actions.

California recognizes the liability theory of inverse condemnation. Rooted in both the United States[19] and California[20] constitutional provisions that property owners be compensated for a governmental taking, inverse condemnation applies where there is a taking of some valuable property right by a public agency or a private entity with the power of eminent domain, which directly and specially injures the property owner.[21]

California courts have extended the doctrine of inverse condemnation to apply to privately-owned public utilities that caused damage while engaging in a public use.[22] Specifically related to wildfire losses, the court in Barham v. Southern California Edison Co. found an energy company liable for damage to private property that resulted from a wildfire. The plaintiffs alleged the damage was caused by the failure of the energy company’s overhead power line equipment.[23] The court held that when a privately owned public utility engages in a public undertaking, such as transmission of electric power to the public, damage resulting from that undertaking can constitute inverse condemnation.[24] Damage in these types of actions can involve either claims for tangible physical invasion of property, physical damage of property, or intangible intrusion of property, not resulting in damage to the property but placing a burden on the property that is direct, substantial, and peculiar to the property.[25]

This type of strict liability is particularly distressing for insurers, and something that should be considered when writing policies for California insureds. Under the theory of inverse condemnation, private companies providing a public utility (i.e., electric companies) may be liable for takings that occur during the provision of those services. This includes any damage that results from wildfires caused, for example, as a result of downed power lines, whether intended or not. The strict liability exposure under the doctrine should certainly be a consideration during the underwriting process.

Issues with Underinsurance

There are also issues with California residents and businesses who are underinsured for wildfire losses. Many homeowners and businesses simply do not review their policies with any sort of regularity.  As a result, when wildfires or other tragedies hit, they find themselves with policy limits that have not kept pace with market prices for labor and repair materials. This is particularly true now that there are global supply chain issues influencing the prices of building materials. Additionally, homeowners do not often seek out additional coverages outside of the primary dwelling coverage. Specifically, homeowners find themselves underinsured by either neglecting to include, or not purchasing a sufficient amount of, “other structure” coverages to include property improvements (i.e., pool houses, detached garages, in-ground pools, sheds, etc.).

Homeowners also may not consider procuring sufficient levels of coverage for additional living expenses (“ALE”) they might incur should their property become unlivable. Generally speaking, ALE coverage is a percentage of the total coverage available under the policy. Homeowners who do not consider or underestimate the amounts likely to be needed in the event of a loss could find themselves having exhausted ALE proceeds before their structure is repaired or rebuilt, particularly when the majority of rebuilds following wildfires take over a year.[26]

With regard to ALE, Senate Bill 872, signed into law by Governor Newsom in 2020, provides that residents under mandatory evacuation for wildfire, even if they suffer no damage to their home, will receive ALE for at least two weeks, with extensions for good cause.[27]  Additionally, in an attempt to help underinsured Californians, Governor Newsom recently signed into law AB 2756, which provides that residential fire policies that provide dwelling structure coverage will be required to include a minimum of 10% of primary dwelling limits as an additional amount available to help consumers rebuild resiliently with upgraded building codes such as fire sprinklers and solar panels.[28]

In conclusion, the issues discussed in this article have significant implications for coverage for California wildfire losses. Underwriters should keep these issues in mind when insuring risks in the state, and tailor their policies accordingly.

José Umbert is a partner with Zelle LLP in London. He can be reached at jumbert@zelle.com. Ron Burnovski is counsel with Zelle LLP in Dallas. He can be reached at rburnovski@zelle.com. Thomas D’Antonio is a senior associate with Zelle LLP in Oakland. He can be reached at tdantonio@zelle.com.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] In 2017, there were 9,270 wildfires in the state of California, burning an estimated 1,548,429 acres and damaging or destroying 10,280 structures. https://www.fire.ca.gov/incidents/2017/.

[2] In 2018, there were 7,948 wildfires in the state of California, burning an estimated 1,975,086 acres and damaging or destroying 24,226 structures. https://www.fire.ca.gov/incidents/2018/.

[3] In 2020, there were 9,917 wildfires in the state of California, burning an estimated 4,257,863 acres and damaging or destroying 10,488 structures. https://www.fire.ca.gov/incidents/2020/.

[4] City of Carlsbad v. Insurance Co. of State of Pennsylvania, 180 Cal.App.4th 176, 183 (2009).

[5] Garvey v. State Farm Fire & Casualty Co., 48 Cal.3d 395, 412-413 (1989).

[6] De Bruyn v. Superior Court, 158 Cal.App.4th 1213, 1223 (2008).

[7] Julian v. Hartford Underwriters Ins. Co.,  35 Cal.4th 747, 751-758 (2005).

[8] Mission National Ins. Co. v. Coachella Valley Water Dist., 210 Cal.App.3d 484, 497 (1989) (“The insurance company, in drafting the insurance contract, had the right to enlarge coverage beyond the statutory language[.]”).

[9] California’s Latest Wildfire Problem: Insuring the Tree Trimmers, New York Times, Sunday, September 29, 2019, quoting Mr. Milton Smith, Senior Vice President at McGriff, Seibels & Williams; available at https://www.nytimes.com/2019/09/29/business/california-fire-insurance.html.

[10] Bank of the West v. Sup.Ct. (Industrial Indem. Co.), 2 Cal.4th 1254, 1258 (1992).

[11] AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 814 (1990).

[12] Id.

[13] Civ. Code, § 1638 (emphasis added); Bank of the West, 2 Cal.4th at 1264.

[14] De May v. Interinsurance Exchange, 32 Cal.App.4th 1133, 1137 (1995).

[15] Sarchett v. Blue Shield of California, 43 Cal.3d 1, 14–15 (1987).

[16] Wildfire survivors now covered by new insurance protections, California Department of Insurance, July 27, 2021, available at http://www.insurance.ca.gov/0400-news/0100-press-releases/2021/release078-2021.cfm.

[17] California Utility PG&E Pleads Guilty to 84 Wildfire Deaths, BBC, June 16, 2020, available at https://www.bbc.com/news/world-us-canada-53072946

[18] Cal Fire: PG&E Equipment Caused 12 Northern California Fires During October Firestorm, The Press Democrat, June 8, 2018, available at https://www.pressdemocrat.com/article/news/cal-fire-pge-equipment-caused-12-northern-california-fires-during-october/

[19] U.S. Const. Amend. V.

[20] Cal. Const. art. I, § 19.

[21] Albers v. Los Angeles County, 62 Cal.2d 250, 258 (1965).

[22] Barham v. Southern Cal. Edison Co.,  74 Cal.App.4th 744, 753-754 (1999).

[23] Id. at 756.

[24] Id. at 753-754.

[25] See Cal. Const., art. I, § 19; See also Boxer v. City of Beverly Hills, 246 Cal.App.4th 1212, 1218 (2016).

[26] Getting Back What You Lost — Rebuilding In A Wildfire Zone, NPR, Tuesday, October 16, 2018, available at https://www.npr.org/2018/10/16/656532029/getting-back-what-you-lost-rebuilding-in-a-wildfire-zone; Rebuilding After the Fire, County of Napa, https://www.countyofnapa.org/2225/Rebuilding-After-the-Fire (estimated post-wildfire rebuild time 18-24 months).

[27] Wildfire Survivors Now Covered By New Insurance Protections, California Department of Insurance, July 27, 2021, available at http://www.insurance.ca.gov/0400-news/0100-press-releases/2021/release078-2021.cfm.

[28] Id.

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