In an eerie repeat of last fall’s devastating fire season, Northern and Southern California are yet again in the midst of what is anticipated to be one of the costliest collections of wildfires in history. In the deadly Woolsey Fire in Southern California, which firefighters estimate will take weeks to contain, more than 91,000 acres have been devastated and some 370 structures destroyed, including very costly homes in Malibu. A utility company recently reported a disturbance with a circuit some two minutes before the fire started. A second deadly blaze, the Camp Fire, was reported up north in Butte County near a regional utility outage. The Camp Fire has destroyed some 135,000 acres and 8,800 structures. The Hill fire in Ventura County consumed some 4,500 acres in an area just reeling from a mass shooter at a nightclub. In addition to these two deadly fires (2 people died in the Woolsey Fire and some 48 have perished in the Camp Fire at last count), there are a dozen or so smaller fires, from the Garner Fire near the Oregon border to the Fork Fire in Azusa in southern reaches of Los Angeles County. But these most recent fires are not the only blazes this year.
The 2018 wildfire season in California has been one of the most destructive on record. During 2018, 7,579 fires had burned an area of 1,667,855 acres, the largest amount of burned acreage recorded in a California fire season, according to the California Department of Forestry and Fire Protection and the National Interagency Fire Center, as of November 11. The fires caused over $2.975 billion in damages, including $1.366 billion in fire suppression costs. Through the end of August 2018, Cal Fire alone spent $432 million on operations. The Mendocino Complex Fire burned more than 459,000 acres, becoming the largest complex fire in the state's history, with the complex's Ranch Fire surpassing the Thomas Fire and the Santiago Canyon Fire of 1889 to become California's single-largest recorded wildfire.
The cause or causes of the current conflagration remain under investigation, but there is little doubt that a prolonged, extremely dry Summer, as well as Santa Ana winds blowing in from the desert, contributed to the tinder box conditions. Most experts agree that 95 percent of the time, fire is initiated by some human activity, be it arson, a careless campfire, or a stray spark from a powerline, rather than a bolt of lightning.
Insurers will focus on the cause of the fires and will initially investigate to not only transfer the risk of their own losses to third parties (such as suing the utilities after paying some insureds for their losses) but also to delay or attempt to avoid paying their insureds when doing so can be at all justified. How the investigations play out may affect how insurance carriers respond to claims under homeowner or commercial fire policies—with possible arguments over the actual cause of loss and thus applicable limits or deductibles.
The catastrophe modeler RMS estimated economic losses from the 2017 fires at between $3 billion and $6 billion, which would make those wildfires the most expensive in history. This year is likely to exceed those estimates. The insurance industry is likely to feel the effects of these losses, and as counsel for policyholders, we will be on the lookout for what will come next. Homeowner policies must include fire coverage by state law, but commercial policies are not so carefully regulated. Insurers can refuse to renew coverages, of course, in compliance with state law and if they pull out of the market altogether. Insurers can certainly increase the premiums on renewals. Commercial policies may be more restrictive and expensive in future years.
As businesses begin the process of recovery and look to their insurance carriers to mitigate their losses, they will be confronted by a number of critical issues. Early attention to these issues, and the choices that must be made, is the surest way to maximize insurance recovery. Here are some guiding principles, taken from decades of experience representing insurance policyholders in California and around the globe.
Provide Notice to All Potentially Pertinent Carriers
Policies always contain conditions to coverage that require notice within a certain time frame, sometimes specific, sometimes as is reasonable (“as soon as practicable” is the most commonly used term). Do not delay. The notice need not be detailed, but should provide a date the loss was discovered, and identify potential losses, e.g., property damage and business interruption loss, with details to follow.
Notice may be provided directly to the insurer or through your broker or agent. This is among the most important duties of an insurance agent or broker. Even if you contact your insurer directly, you should also contact your insurance agent or broker. If you are likely to incur major expenses to mitigate or reduce your loss, inform your insurance carrier of this fact and seek prior consent, if possible. While most property policies provide that an insured is obligated to mitigate losses and some even provide special sub-limits for emergency services, it is always better to advise and obtain consent from the insurer before incurring major expenses. The insurer must act reasonably in the timing of its response and in providing consent.
Assemble a Claims Team, including Appropriate Experts
A critical element to successful insurance recovery is assembling a qualified and experienced claims team. This typically includes your risk manager, your CFO or treasury designee, your insurance broker, a forensic accountant and coverage counsel. Forensic accountants are necessary if you have business interruption loss. Additional experts may be needed to model any unique financial aspects of your business. Expert fees are frequently covered under property policies, subject to sub-limits. Cooperate with the insurance company adjuster, but don’t forget that the adjuster works for the insurance company, not for you. If you need an advocate, hire your own. Engaging counsel early in the process can help avoid costly mistakes and maximize your coverage. And don’t just rely on your broker or agent; they are always well-intentioned but do not always have the resources or expertise you need to maximize your recovery.
Review Policies for Potential Coverage
In the aftermath of so many recent natural disasters, policyholders have had to deal with multiple different perils or kinds of losses—some expressly covered, some perhaps limited or even excluded. For example, earth movement, foundation settlements, water damage are often limited or excluded in property policies.
The broadest kind of commercial policy is an “All-Risk” policy, which covers all direct damage to the insured property, regardless of the cause of the damage, unless excluded. The other kind of property policy is a “Named Perils” policy, which only covers specifically named perils or risks of loss but may also contain a long list of excluded perils. It is important to read and understand your policies. An All-Risk policy places the burden of proving an exclusion on the insurer (you are covered unless the insurer can prove an excluded peril was the cause of loss), whereas a Named Peril policy places the burden of proving a covered peril or covered cause of loss on the insured (you are only covered if you can prove the loss was caused by a covered peril.)
Because of the composite structure of commercial property policies—with different sub-limits and deductibles for specific perils, and a bevy of confounding waiting periods, deductibles and sub-limits for business interruption coverage that are stated in terms of time periods rather than dollars—it is extremely important to understand exactly what coverage is available before formulating your claim. For complex losses, a consultation with knowledgeable coverage counsel may be very helpful.
Document Your Losses
Photograph and keep careful notes of damages to your property and the property of others affecting your business. This includes suppliers, distributors, storage facilities, utilities, service providers, and key customers. For financial losses, carefully document lost or delayed sales, and track “extra expenses” incurred to keep the business running or to reduce loss of business (e.g., providing more expensive product where contracted product is damaged). Keep a separate account to record expenses related to the fire and retain all receipts.
Evaluate Your Business Interruption and Contingent Business Interruption Coverages for Potential Issues
Your policy should cover your loss of income caused by direct physical loss to your property, but that is only the starting point. Most modern commercial policies also provide extended coverage for certain categories of loss caused by damage to third-party property. This includes damage to utilities and other services, to property that permits entrance or exit to your property, and to property of customers or suppliers. The latter coverage, for damage to upstream and downstream vendors and customers, is called Contingent Business Interruption coverage.
Experienced counsel could review your policy carefully to provide advice on how to present your claim to maximize these coverages.
Prepare a Loss Timeline
Understanding and documenting the timing of your loss may well turn out to be the most important step you can take to maximize coverage. Your policy will likely include a waiting period, stated in terms of days or weeks—ranging from 1 to 45 days—before business interruption coverage applies. Given the catastrophic nature of wildfires, the state insurance commissioner may pressure insurance carriers to waive or curtail waiting periods, along with notice requirements, and to take a more generous approach to coverage. Monitor these developments, as they may affect your rights to recovery.
Some policies treat waiting periods as qualification periods, allowing coverage from day one of the loss once the qualification period is satisfied. Other policies treat the waiting period as a deductible, a practice that may conflict with the policy’s other deductible provisions. Longer waiting periods can dramatically decrease insurers’ coverage exposure when facing large-scale catastrophes, so you can expect that insurers responding to the wildfires may take aggressive positions in this regard.
In addition, your policy may extend your coverage for the period following the actual physical restoration of your business. Policies may include an extended period of liability which extends business interruption coverage for income loss suffered during a specified period of time (e.g., 30, 60 or 90 days) after the damaged property has been repaired. This is particularly useful to provide income after the property is repaired in order to recoup customers that were lost during the period of repair.
Your policy also may extend coverage for loss of business as a result of governmental orders, such as evacuation orders, curfews, highway and other transportation-related closures, air hazard alerts, and the like, which prevent or impair access to the insured’s property. Many of these types of orders have been put in place in connection with the current wildfires. Policies may require that the government order be the result of “physical damage of the type insured,” rather than a preventive or public safety measure. Policies also may require that such physical damage be within a certain distance of the insured property. Several coverage issues tend to arise with respect to civil authority coverage, including whether there first must be actual physical damage, how to measure the distance between the insured location and the site of physical damage (if off-site), and whether a governmental order actually prohibited access to the insured premises.
Check to See if You Are FEMA-Eligible—Government Funds Might Be Available for Nonprofits Providing Critical Infrastructure and Essential Services
FEMA and other government-based programs may provide funds to offset your losses if you are an eligible not-for-profit that provides critical infrastructure or essential services. Critical infrastructure and essential services include: hospitals and other medical-treatment facilities; fire, police and other emergency services; power, water and sewer utilities; educational institutions; libraries, museums and zoos; and community, senior citizen and day-care centers. The program and application process can be complicated and daunting, and strict time limits apply. But a successful applicant can see FEMA reimburse no less than 75 percent of the eligible costs for emergency protective measures and permanent restoration costs.
To summarize, be aware that the value of your insurance policy and your rights as a policyholder may depend on the actions you take and the way you present your loss. Be attuned to the deadlines and your obligations, and engage professionals experienced with your industry and the insurance recovery process. Do not give your carrier an opportunity to escape its coverage obligations based on the failure to meet conditions and deadlines.