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California battled another ferocious wildfire season, with the Dixie blaze now holding the record for the second largest wildfire in the history of the state. As a combination of hotter and drier weather and failing electrical infrastructure are projected to continue to turn the state into a tinderbox ready to ignite during the warmer months, fire damage and smoke taint claims affecting property and large agricultural areas will remain on the rise for the foreseeable future.
For many insurers writing in California’s hotter than ever commodities and business climates through stock throughput policies, fire peril exclusions are becoming an increasingly appealing tool for risk management. Stock throughput policies are designed to provide all risk end-to-end coverage for the flow of goods from the production point to their final destination, whether it be domestic or overseas, both on water and on land. This incidentally includes coverage for losses resulting from fire while in storage or transit; for instance, goods stored in a California warehouse awaiting shipment when a wildfire raging nearby eventually engulfs the premises. Can stock throughput carriers validly disclaim or limit fire loss coverage in such circumstances?
The California Standard Fire Policy and general limitation on fire exclusions
Wrought into California’s Insurance Code[1] is an almost century-long distrust of fire insurance coverage restrictions and exclusions, resulting in the adoption of a statutory Standard Fire Policy. Like its functional equivalents in other states, the relevant statute, enacted in 1935, provides that:
All fire polices ... shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy [...]; provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.
Ins. Code § 2070. The Standard Form fire policy is codified in code § 2071, and insures:
… against all LOSS BY FIRE, LIGHTNING AND BY REMOVAL FROM PREMISES ENDANGERED BY THE PERILS INSURED AGAINST IN THIS POLICY, EXCEPT AS HEREINAFTER PROVIDED, to the property described hereinafter while located or contained as described in this policy …
Id. § 2071 (emphasis in original).
A “fire policy” does not have to be identical to this standard language, but must provide coverage that is at least “substantially equivalent” to the standard form. Id. § 2070; Century-National Ins. Co. v. Garcia (2011) 51 Cal. 4th 564, 568. Any exclusions limiting the standard coverages are void. Mosley v. Pacific Specialty Insurance Company (2020) 49 Cal. App 5th 417, 425. The intent of the legislature was to protect the average insured against highly technical fire policy provisions which became “traps for the unwary” and resulted in unjust forfeitures. Ruffino v. Queen Ins. Co. (1934) 138 Cal. App. 528, 539. In furtherance of this objective, the Code even makes it a misdemeanor “for any insurer or any agent to countersign or issue a fire policy” varying from the Standard Form. Ins. Code § 2083.
But by their own terms, sections 2070-2071 pertain solely to “fire policies.” Stock throughput insurance is an amalgam of traditional marine cargo, inland marine, and warehouse coverage. If this qualifies as “fire insurance,” then section 2070 would prevent marine stock throughput underwriters from excluding or limiting fire loss coverage in their policies below the statutory minimums.
Are stock throughput policies “fire policies”?
The Code contains an original definition of “fire insurance,” defined to include:
(a) Insurance against loss by fire, lightning, windstorm, tornado, or earthquake.
(b) Insurance against loss of, or destruction of, or damage to [property] when such insurance includes loss thereof by fire and excludes coverage of property while in the custody of, or possession of, or being transported by, any carrier for hire or in the mail […]
(c) Insurance by means of an all-risk policy of the type commonly known as the “Personal Property Floater” against any and all kinds of loss of or damage to, or loss of use of, any personal property other than merchandise.
The provisions of Section 2070 shall not apply to insurance written pursuant to subdivisions (b) or (c).
Id. § 102 (emphasis added).
For a policy insuring against fire alongside other risks (like typical all-risk stock throughput coverage) to qualify as “fire insurance,” it must exclude coverage of “property while in common carriage” and “any article constituting stock in trade or used as a sample or sold or held for sale. Ins. Code § 102 subd. (b)(1). Subdivision (c), which is otherwise inapplicable here as it pertains to “Personal Property Floater” policies, also expressly defines fire insurance as policies providing all risks cover for loss of or damage to personal property “… other than merchandise.” Id. § 102 subd. (c). Thus, goods in transit appear to lie outside of the protective scope of “fire insurance.” In any event, the statute expressly provides that insurance falling under subdivisions (b) and (c) is not subject to the restrictions of Section 2070.
Property in common carriage and commodities constituting stock in trade are the principal objects of cargo and stock throughput insurance; they are exactly what they were created to protect. It would therefore follow that policies of the sort cannot be “fire insurance.”
Stock throughput policies are “marine insurance”
Instead, stock throughput policies better fit within the definition of “marine insurance.” The latter constitutes a separate class amid the twenty different insurance classes listed in Section 100, and is befittingly defined to include coverage:
[a]gainst any and all kinds of loss of or damage to […] all goods, freights, cargoes, merchandise, effects […] and all other kinds of property, and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit, or transportation […] on or under any seas or other waters, on land or in the air, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting the same[…].
Ins. Code § 100(3) and 103(a) (emphasis added).
When a particular insurance contract falls under a class other than “fire insurance,” Section 2070 is inapplicable. See Unetco Indus. Exch. v. Homestead Ins. Co. (1997) 57 Cal. App. 4th 1459, 1466–1467; see also, Hellinger v. Farmers Grp., Inc. (2001) 91 Cal. App. 4th 1049, 1055. Unetco interpreted an earthquake policy which expressly excluded fire coverage. The court found that because earthquake-only coverage is best classified as “miscellaneous insurance” as defined in Code § 100(20), the limitations pertaining to the standard fire policy did not apply.
Comment
The same conclusion is appropriate for marine stock throughput policies excluding fire coverage. Marine underwriters are thus free to exclude or sublimit stock throughput policies with regard to fire perils, without running afoul of the restrictions of Ins. Code Section 2070.
Read other items in Coverage Digest - October 2021
[1] All future “Code” references in this article refer to the California Insurance Code.
Insurance and reinsurance
United States