Insurers had their fingers burned by California's growing wildfire exposure

At close to $12bn in insured losses and 45,000 insurance claims, the California wildfires in October and December last year were unprecedented in terms of their exposure and consequences.

While these recent fires were unique in their size and impact, the US is a mature market for wildfire risk and Californian regulators are being vocal on how insurers should respond. Understanding the nature of wildfire exposures and lessons from these recent fires can assist those handling wildfire claims in the US and in other areas of the world where such liability is an emerging risk.

While wildfires can be caused by nature, in the US plaintiffs’ counsel often try to pin liability for wildfires on larger companies that have abundant finances and large insurance programmes. For example, utility companies are frequent targets, as they may have facilities, equipment and power lines in grassy or wooded areas that could serve as potential ignition sources for wildfires. Cable and telecommunication companies that share electric lines with utility companies are also at risk with regard to such claims.

In addition, claims can be made against railroads and companies performing contract, construction or maintenance work for utilities and railroads (including tree trimming and brush clearing).

The liability theories against such companies for wildfires can be expansive and include: negligence, trespass (the fire invaded the plaintiffs’ property), nuisance, intentional or negligent infliction of emotional distress, wrongful death, unlawful or unfair business practices, business interruption and subrogation.

Furthermore, many states have statutes, codes and ordinances governing liability arising out of a wildfire, such that findings of liability or violations by a particular state or agency could serve as a basis to establish negligence.

In addition, in some jurisdictions such as California, if the defendant is a public/quasi-public company that has some power of eminent domain (such as utility companies), plaintiffs might also allege a claim of inverse condemnation, under which the company could be held strictly liable for damages if its activities ignited the wildfire.

Although California has been hit by destructive wildfires in its past, the October and December 2017 wildfires were the costliest fires in the state’s history and caused widespread destruction, wiping out whole neighborhoods and substantial businesses and killing more than 45 people.

The October 2017 fires, which affected northern California’s wine-making region, reportedly caused more than $9bn in losses and led to thousands of evacuations and some reported deaths. The California Department of Forestry and Fire Protection (Cal Fire) has ranked two of the October 2017 fires (the Tubbs and Nuns fires) as the most and the sixth-most destructive fires in California history respectively and the Tubbs fire the third-deadliest.

While it is not yet clear what caused the October 2017 fires, lawsuits have been filed alleging Pacific Gas & Electric Company (PG&E) failed to properly maintain its power lines. The lawsuits are being handled as a single co-ordinated proceeding in the Superior Court of California, San Francisco county, where the parties are briefing PG&E’s demurrer regarding the applicability of inverse condemnation to private utilities.

In December 2017, the Thomas fire burned in excess of 280,000 acres in southern California, becoming the largest and seventh-most destructive in California history. At least 14 lawsuits have been brought against Southern California Edison related to the Thomas fire, including one mass tort claim, one class action and an action brought by the City of Santa Barbara.

Most recently, the presiding judge in the Thomas fire mass tort litigation granted plaintiffs access to certain damaged equipment for inspection.

Extraordinary measures

The severe fire season may be attributable to global warming or the time of year the fires occurred. In any event, the catastrophic nature of the fires has led California’s insurance commissioner to take extraordinary measures, including getting insurers to waive requirements for policyholders to submit detailed home inventories.

Several reports also suggest the destruction of vegetation in hilly areas by the fires make those areas more susceptible to mudslides. In fact, the commissioner issued a formal notice to insurers on January 29 advising mudslide exclusions in property/casualty policies are not enforceable where the “efficient proximate cause” of the mudslide was the damage caused by the wildfires. In California, the “efficient proximate cause” doctrine basically provides if a loss is caused by a combination of a covered and specifically excluded risk under a given insurance policy, the loss is covered if the covered risk was the “predominate” cause.

As reported in the press, the heavy rain in southern California around the areas affected by the Thomas fire triggered a mudslide that caused significant property damage and led to more than 20 deaths. Significantly, the commissioner’s notice provides, based on “preliminary information”, there is a “substantial basis to indicate the Thomas fire was the efficient proximate cause” of the mudslides. Further, the possibility remains future mudslides could be attributable to the damage caused by the fire, which could potentially compound the overall exposure.

California’s unprecedented 2017 fire season shows wildfire exposures continue to carry the potential for costly claims. Nonetheless, both insurers and insureds can take steps to mitigate the financial impact of wildfires. Insurers can check insureds comply with statutory obligations and regularly check on compliance. Insurers can also inspect insureds’ maintenance protocols and loss history and ensure insureds are proactively maintaining their property, rather than “run to failure” maintenance strategies.

Insurers must also consider the potential for frequency and severity of wildfires based on location, as well as any particular jurisdiction’s law on proximate cause. Given there may be multiple fires in a single year, insurers likewise can consider setting one limit for all wildfires in a given policy period or excluding or providing sub-limits for wildfire exposures.

Insureds can also take steps to train their employees and contractors effectively on fire safety and compliance with applicable regulations. They also should ensure there are adequate contractual protections in place with third parties that could share liability.

These risk mitigation points should help limit the potential financial consequences insurers and insureds may face arising from wildfire exposures, as well as assist those considering the potential for wildfire exposure in countries where it remains an emerging risk.