California Wildfires: Essential Insurance Recovery Considerations for Businesses and Homeowners

The devastating wildfires that have rapidly spread across Los Angeles this month underscore the need for businesses and homeowners to be prepared to make insurance claims when natural disasters strike. This LawFlash details five recommended steps to help preserve and maximize insurance recoveries in the wake of this ongoing tragedy and others like it.

Even with the flames still burning in the Pacific Palisades, Altadena, and other parts of Los Angeles County, the scale of the damage caused by the current Southern California fires dwarfs previous fire disasters. Total insured losses have already been estimated at more than $30 billion, far exceeding the previous record of $12 billion in insured losses caused by Northern California’s Camp Fire in 2018. Thousands of dwellings and commercial buildings have been destroyed; countless lives and businesses have been disrupted. Insurance will play a vital role in the recovery efforts of both companies and families.

Businesses and homeowners will face lasting impacts from property damage or destruction, while bearing additional expenses to resume their lives and operations while the damage is addressed. There is also potential for significant business income loss resulting from not only direct physical damage to property, but also disruptions such as property damage, road closures, or evacuation orders in surrounding areas; power outages and interruption of other utilities; and supply chain disruptions.

It is critical that policyholders evaluate the potential for coverage of these losses and understand the complex process of pursuing insurance recoveries.

1. IDENTIFY ALL AVAILABLE INSURANCE POLICIES

Locating and carefully reviewing all potentially applicable insurance policies is a critical first step in seeking recovery for a policyholder’s losses.

For businesses, the most likely source of coverage will come from a company’s first-party commercial property and business interruption policies. These policies, which can be marketed under a variety of different names by different insurers, typically contain the following key coverages potentially applicable to losses caused by fire:

• Property Damage insurance typically covers physical loss or damage to business premises and other property owned or leased by the policyholder, such as damages caused by fire, but also disasters involving wind, ice, snow, or water.
• Time Element/Business Interruption insurance refers to coverage for losses resulting from the inability to use damaged property for its normal uses or a decrease in production, including, for example, loss of earnings or profits.
• Contingent Time Element/Business Interruption coverage insures against business interruption or extra expense losses caused by physical loss, damage, or other disruptions to a supplier, customer, or other party in a supply chain.
• Extra Expense covers additional expenses incurred in excess of regular operating costs to continue or resume normal operations or mitigate losses while the loss or damage to property is ongoing or being repaired, replaced, or otherwise addressed.
• Service Interruption generally covers damage to property and goods as well as income losses caused by interruption of utility services to covered premises, such as power outages, often requiring physical loss or damage at the utility service provider’s premises.
• Ingress/Egress insurance provides coverage for losses incurred when access to and from an insured property is prevented by physical damage—for example, surrounding fire damage or fallen trees prohibiting entrance.
• Supply chain insurance may provide additional coverage for disruptions in the supply chain, including coverage for non-physical interruptions.

For homeowners, policies may include the following coverages that may apply to losses due to fire:

• Dwelling coverage typically covers the replacement cost (i.e., the amount needed to rebuild a home of like quality in present day) or the actual cash value of the destroyed home and other covered structures when damaged or destroyed by fire.
• Contents/Valuable Articles coverage typically covers the homeowner’s personal property at the insured home from damage or destruction by fire.
• Extra Coverages may include:
  • Loss of Use/Additional or Extra Living Expenses for the reasonable increase in a family’s normal living expenses that is necessary to maintain the homeowner’s usual standard of living after their home becomes uninhabitable. Insurers may also cover forced evacuation expenses and loss of fair rental value of the home in certain circumstances.
  • Fair Rental Value if the home was rented to others, held for rental, or occupied by the owner and becomes uninhabitable. Fair Rental Value typically means the fair rental value of the home less any expenses that do not continue while it is not fit to live in. The details of this coverage vary from policy to policy. Attention should be paid to limits and duration of this coverage.
  • Forced Evacuation Expenses due to a reasonable threat of damage or destruction from fire or as required by a civil authority’s evacuation order due to a nearby fire, even if there was no damage to the home.
  • Miscellaneous other coverages that may assist with rebuilding or repairing homes damaged by fire include coverage for construction materials; additional costs of complying with building codes when rebuilding or repairing; temporary or precautionary repairs to prevent additional covered damage; stabilizing or excavating land; debris removal; landscaping restoration and tree removal or replacement; replacing alternative power or water systems; and other expenses.

Some California homeowners may have fire coverage through the state’s FAIR Plan as a last resort, because the private insurance market has increasingly refused to provide fire coverage for homes in high-risk areas in recent years. FAIR Plain policies typically provide more limited “named peril” coverage for fire and other specified risks, including:

• Dwelling covers the physical structure of the homeowner’s dwelling, excluding the land on which it is located, from damage by fire and smoke.
• Other Structures covers structures apart from the dwelling itself, including those connected to the dwelling by only a covered walkway, wall, fence, etc. from damage by fire and smoke.
• Personal Property covers the homeowner’s property, or that of a guest or employee, that is located at the dwelling, from damage by fire and smoke.
• Reasonable Repairs coverage applies when damages has already occurred and the homeowners incurs reasonable costs to protect against further damage.

All these business and homeowners’ coverages often have varying applicable limits of liability or time limits, and different deductibles may also apply.

2. COMPLY WITH NOTICE, PROOF OF LOSS, AND SUIT-LIMITATION CLAUSES

Identifying and complying with time-sensitive policy requirements is a crucial step in preserving rights under an insurance policy. For example, insurance policies often require that an insured provide adequate notice of a claim. Although requirements for how and when to give notice or file a claim vary by policy and state law and need to be carefully examined, many policies require notice of a loss as soon as practicable. Commercial property policies also generally require that a sworn proof of loss be submitted within 60 to 90 days, or sooner, absent written agreement by the insurer.

Finally, many policies also require that any suit under the policy be filed within one or two years after inception of the loss. Given these often-strict and time-sensitive requirements, insurance recovery counsel, brokers, and agents should be involved immediately to assist with claims.

3. DOCUMENT DAMAGE AND MAINTAIN RECORDS

Evaluating the full extent of loss and damage following a fire takes time. A business should begin documenting and quantifying any damage or business interruptions as soon as possible; this may involve collaboration among the business’s operational, finance, and accounting personnel. Homeowners should take similar steps when seeking recovery for their lost or damaged possessions and their extra expenses due to fire or other causes of loss. Key actions will include the following:

• Separate any damaged property from undamaged property to the extent possible and when safe to do so.
• Take photographs and videos of the damage, including structural damage, affected objects, and the surrounding vicinity.
• Itemize damaged or lost items, their date of purchase and value, and collect receipts.
• Track extra or expediting expenses needed to continue business operations, such as
  • costs of emergency gear and protective equipment
  • added freight charges for quicker delivery of emergency supplies
  • relocation costs
  • advertising or notification costs
  • costs associated with maintaining lost power, e.g., generators
  • costs for water or other impacted utilities
  • overtime pay.
• Locate business accounting records relevant to financial performance and loss of earnings or revenue.
• Obtain copies of fire department, police, or other relevant reports.
• Keep crisis response, evacuation, and other recovery-related purchase orders, invoices, receipts, and other documentation.

4. COOPERATE WITH THE INSURANCE COMPANY

Many insurance policies require that the policyholder cooperate with the insurer’s investigation of a claim. Cooperation does not mean capitulating to unreasonable requests by the insurer or responding to requests that are irrelevant to a coverage determination or designed to limit or deny coverage or to increase the burden on the policyholder, but reasonable cooperation is generally required.

5. ENGAGE AN EXPERIENCED TEAM

In the aftermath of a fire, hundreds of tasks need attention. Many businesses are not only managing their own losses and damages but are also working around the clock to meet the needs of their employees, customers, consumers, and other stakeholders. Homeowners similarly need to overcome the emotional trauma of losing a cherished home while finding suitable replacement shelter for their families and resuming their livelihood amid the rebuilding process. Given these concerns, it is important to think proactively and critically about assembling an insurance recovery team.

HOW WE CAN HELP

Morgan Lewis can assist ahead of natural and manmade disasters with insurance coverage preparedness, as well as after the event with claim notification and presentment, loss assessments, information gathering, proofs of loss, claim negotiation, and—if necessary—coverage litigation to enforce policyholders’ insurance rights and maximize insurance recoveries.

Morgan Lewis’s insurance recovery team has experience and cultural and business ties with Los Angeles County and its areas affected by the wildfire outbreak. Our team members, including those in our Los Angeles, Century City, and Orange County offices, are positioned to assist clients in preserving and pursuing recovery from their insurers for their property damage and other covered losses.

Morgan Lewis helps clients navigate the wide range of legal and regulatory challenges that can arise from severe weather events and natural disasters. Please visit our Severe Weather and Natural Disasters page for more information.