Wildfires are causing monumental losses to homes and businesses in and near Los Angeles.  The fires continue to spread and the devastation will only get worse.

Not only have thousands of properties been totally destroyed in the fires, but many thousands of businesses lucky to escape direct fire damage will nonetheless suffer significant business interruption losses due to smoke and access restrictions as well as power outages.  For example, Universal Studios already has announced that it is closing “as a result of the extreme winds and fire conditions” and Variety is reporting that various events, productions and film and television shoots are being disrupted due to the fires.

Such business interruption losses commonly have been covered by standard property insurance policies.  As to smoke-related losses, an Oregon court ruled in 2016 that losses suffered by a theatre that closed for four nights “due to health concerns from the poor air quality caused by the wildfire smoke” were covered under a standard commercial property insurance policy.  Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., No. 1:15-cv-01932-CL, 2016 WL 3267247, at *5-6 (D. Or. June 7, 2016).  Moreover, most commercial property policies include “civil authority” coverage for losses caused by evacuation orders, as well as “service interruption” coverage for losses due to power outages.

When the COVID-19 pandemic struck, the insurance industry circled the wagons and launched a massive public relations campaign aimed to convince the public and judges that COVID-related business interruption losses were not covered because COVID did not cause “physical loss or damage.”  The insurance industry’s claims were contrary to the judicial precedent, which consistently held that where property is rendered unfit for its intended use – as by smoke, toxic fumes or noxious odors – policyholders are entitled to coverage even if property has not been structurally altered.  The industry claims were also contrary to the payment of millions of dollars in claims for business interruption losses in Asia during the initial SARS-CoV-1 outbreak in 2003 – all under policies that also required “physical loss or damage” to property.

Despite this judicial and claims history, the insurance industry was largely successful in its effort to deny coverage for COVID-19 business interruption losses in 2020.  Over 15 state supreme courts – including California – have held that COVID does not cause the “physical loss or damage” required to trigger property insurance coverage.  Two state supreme courts – North Carolina and Vermont – have held fast to pre-pandemic precedent and ruled in favor of policyholders on this issue.  (The author filed amicus briefs in support of the policyholders in the cases before the North Carolina and Vermont Supreme Courts.)  The fact remains that standard property insurance policies cover business interruption losses resulting from wildfire smoke.

When Los Angeles businesses turn to their insurance companies for help in the wake of the current wildfires, how will the insurance industry respond this time?  Will insurance companies try to hide behind COVID-19 decisions or will they return to honoring the promises made in their policies as they did following the initial SARS outbreak in 2003?

Be on the lookout for false assertions by the insurance industry that it cannot afford to pay claims given the extent of the damage at hand.  In reality, insurance companies historically increase profits in the wake of catastrophes.  As the Consumer Federation of America meticulously studied and reported, “[w]hile insurance executives frequently remind the public and regulators of the frequency and severity of catastrophic events, industry data demonstrates that insurers have significantly and methodically decreased their financial responsibility for these events in recent years and shifted much of this risk to consumers and taxpayers.”  Accordingly, the insurance industry is sitting on a record surplus of over $1.1 Trillion, an astonishing sum that is there to pay claims.

Businesses affected by the current wildfires should get out their policies and assess the coverage available to protect against the losses they are experiencing.  Obviously, business devastated by direct fire losses will depend heavily on their insurance companies fulfilling the promises to pay made in their policies.  Businesses suffering indirect losses due to smoke, access issues and power outages should look to the coverage provided for business interruption, contingent business interruption, civil authority and service interruption, among others that may respond to the current situation.  Everyone affected should demand that their insurance company pay what they promised under the policies they sold.