Vine to wine, and the fire in between – the growing insurance implications of the California wildfires
2018 has been another year of devastating wildfires in California. The November 2018 Camp Fire was reported as the deadliest and most destructive in the state’s reported history, and the July 2018 Mendocino Complex fire was reported as the state’s largest. These wildfires blazed through California while claims for the October and December 2017 wildfires - which, at that time, had been deemed “unprecedented for their severity and disastrous consequences” – were still being investigated and resolved.
Wildfires and wine
Among those impacted by the recent wildfires has been California’s wine industry. California is the fourth largest wine maker in the world. In 2017, California’s wine sales in the US market alone were US$35.2 billion, shipping 278 million cases in the US and worldwide.
The recent wildfires impacted California wineries at varying levels; some sustaining minor damages while others reporting complete losses. Damages were estimated to top US$3 billion for the 2017 wildfires alone. As well as damage to the wines themselves, losses included damage to winery buildings (including storage facilities), water systems, homes, vineyards, landscaping, tasting rooms and crush pads. Wine tourism in California also was affected.
Where there is a wildfire near a winery, there is also the risk of “smoke taint” on the wine that is produced. The extent of potential damage depends largely on when the grapes were exposed to smoke. About 90% of grapes had been harvested before the October 2017 fires even began; however, the 2018 fires began before veraison season, which is when the grapes first begin to soften, change colour and changes occur in how the fruit accumulates sugars.
Concerns about smoke tainted wines can be expensive. In late September 2018, one company cancelled contracts to buy 2,000 tons of grapes from Oregon – valued at US$4 million – in light of such concerns.
The impact of these winery losses extends beyond the US. The London Market is seeing significant claims; specialty lines cover wineries’ buildings and properties and Lloyd’s syndicates provide cover for wine in production and storage (for which smoke taint will be a major concern).
As ‘admitted’ Californian insurers (which are subject to a regulatory regime that includes filing rates to the California Department of Insurance) continue to update their risk models, non-admitted insurers – such as Lloyd’s syndicates – could see a bigger share of this market. How this will fit with the syndicates’ current business plans in the wake of Lloyd’s strategic review - which has resulted in many syndicates opting to cease writing certain ‘risky’ lines of business, including several marine lines – remains to be seen.
Given the increased severity and frequency of wildfires in California, as well as the wide range of damages that may ensue, wineries need to ensure that they have adequate insurance coverage in place to cover such losses. How their policies handle smoke damage, and what happens when a company cancels a contract due to issues stemming from wildfires, such as perceived smoke taint, will be key. Whether there is cover for damage to crops due to electrical failure or staff shortages rather than directly from fire should also be considered; as should event cancellations and business interruption – from wine tastings through to weddings.
If a winery’s insurance does not cover the entire loss, either because of the lack of coverage or the lack of sufficient limits, it is also possible that they could pursue other parties that may ultimately be responsible for the wildfire. Utility companies, for example, are consistently targeted as potential defendants in connection with wildfire liability claims under general liability policies. Indeed, as one article in the New York Times summarised on 15 November 2018:
“Cal Fire has determined that of the 21 major fires last fall in Northern California, at least 17 were caused by power lines, poles and other equipment owned by Pacific Gas and Electric Company.”
Utility companies are not the only potential defendants. As we previously reported, other potential defendants may include cable and telecommunication companies, railroads, companies performing contract work for utilities and railroads, and environmental services companies performing cutting, trimming, and brush clearing services.
Shareholder derivative and securities actions were recently filed against PG&E and a securities action was filed against Southern California Edison Company in connection with the 2018 California wildfires. In both cases, plaintiffs allege that there was a drop in the respective company’s stock price following the announcement of regulatory investigations of those fires. These types of lawsuits could trigger the utility companies’ D&O policies, which shows the breadth of the types of coverages that could potentially be triggered by these catastrophes, and also touches on the issue of corporate responsibility with regard to climate change.
As this risk shows no sign of slowing down, property owners and businesses should review their policies to make sure there are no – potentially expensive – gaps in cover. Insurers should also be aware of the extent of the cover they are providing and the various types of defendants and coverages that could be implicated.