Where there’s fire, there’s smoke: The evolving LA wildfire claims landscape

While the devastating Los Angeles wildfires earlier this year were extinguished, the risks associated with those fires – and wildfires more broadly – continue to affect policyholders. In this episode, Nick Insua, Matt Weaver and Kya Coletta discuss important topics related to wildfires, including recent insurance updates, smoke damage remediation, the threat of mudslides, the California FAIR Plan and the process of rebuilding after a loss.

Transcript:

Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. 

Nick: Welcome everyone to the Reed Smith podcast Insured Success. My name is Nick Insua. I’m a partner in the New York and New Jersey offices of Reed Smith and I’m in our insurance recovery group. I primarily work on first party property and business interruption insurance claims although my practice is varied on liability coverage disputes as well. I'm joined for today's podcast by my partner, Matt Weaver. Matt is a partner in our Miami and Dallas offices, and a significant part of his practice involves dealing with the aftermath of natural disasters. And finally, we are joined by Kya Coletta. Kya is an associate in our Los Angeles office, and she primarily focuses her practice on representing corporate policyholders in insurance coverage disputes and does have a particular focus currently on losses relating to aviation clubs. And today we're going to be talking about some of the current legal and different coverage developments related to the terrible wildfires that struck the Los Angeles and greater Los Angeles area early in this year of 2025. We did want to acknowledge the devastating losses that many families and the communities there are facing due to these recent wildfires. Our hearts continue to go out to everyone affected. And we hope to provide some useful insights today and resources to assist those affected in recovering. Our firm, along with many, not only in the West Coast, but around the country, work very closely with an organization called United Policyholders. They're a nonprofit organization that provides invaluable information and support for policyholders navigating insurance claims and recovery efforts. Homeowners should visit their website for guidance on filing claims, negotiating with insurers, and accessing disaster recovery resources. United Policyholders is based in California and has a lot of experience dealing with natural disasters and their aftermath from an insurance perspective, and in particular on wildfire claims. Our podcast today is going to hit on a few key topics. The key areas of focus will be smoke damage remediation, mudslides, the fair plan, rebuilding after a loss, and some recent insurance policy updates. The reason why these topics matter is because there is and we've seen an increased risk of wildfires. Not only these in California, but others in California. We've now seen some subsequently in southwest of the United States. This is a risk that's growing in frequency and severity. Insurance policies, terms and conditions are evolving, and there's a lot of change in policy terms and how those might apply to losses. And we've also seen some recent court rulings from California, and there will be others, undoubtedly, that all policyholders and lawyers working with them should be aware of. So with that, we're going to step into some substantive segments of our podcast. Our first segment is going to be key initiatives by Insurance Commissioner Ricardo Lara since our last podcast. And the first topic in that segment is going to be provisional approval of State Farm's rate increase request. And I'm going to ask Kya if you would chime in on what's behind the 22% emergency rate increase approval? 

Kya: Thanks, Nick. As of last week, the Insurance Journal reported that insurance companies have so far paid out more than $12 billion for losses from the Los Angeles area wildfires. This figure nearly doubles the $6.9 billion in claims reportedly paid out last month. State Farm General, the company's California-only subsidiary, has cited increasing payouts and rising reinsurance expenses as justification for the rate hike to pay out future policyholder claims. This request by State Farm would raise rates by 22% for homeowners and 15% for renters. The commissioner's approval is provisional, meaning State Farm must not only pause policy cancellations in the interim, but also present supporting data during an April 8th public hearing before full approval is granted. If State Farm is unable to substantiate the validity of these rates at the hearing next month, the commissioner has stated that State Farm will have to issue full refunds with interest to the impacted policyholders. This emergency rate increase approval reflects broader concerns about the financial stability of insurance companies in California's high-risk wildfire zones and seems to be an attempt to keep State Farm from withdrawing from the state. We should know more after the April 8th hearing, which is held before an administrative law judge and Commissioner Lara, so stay tuned. 

Nick: Great, thank you. And there's also a directive for comprehensive investigations of smoke damage claims. Can you tell us a little bit about that new directive? 

Kya: Sure. Many policyholders were fortunate that their homes remained standing during the L.A. wildfires. However, many of these homes are uninhabitable due to unclean air, unsafe drinking water, and lingering harmful substances. Despite this, insurers have pushed back on smoke damage claims, arguing that smoke damage does not constitute, quote, physical loss or damage to, unquote, property. Earlier this month in response, on March 7, 2025, Commissioner Lara issued Bulletin 2025-7, which provides guidance on the handling of smoke damage claims for properties affected by the LA wildfires. It clarified the Department's position on insurance coverage for smoke damage and outlined the expectations for insurance companies in processing these claims in three major ways. First, the Bulletin advised that it expects insurers to handle smoke damage claims in compliance with applicable laws, regulations, and best practices. This includes adherence to California Insurance Code Section 790.03(h), which requires insurers to adopt and implement reasonable standards for the prompt investigation of processing claims, as well as adherence to Section 2695.7(d) of the Fair Claims Settlement Practices Regulations, which essentially mandates insurers to conduct and diligently pursue a thorough, fair, and objective investigation of claims. It is also unreasonable under this section for insurers to require policyholders to incur substantial costs to investigate their own claims. If professional testing is warranted, insurers are expected to contract and pay for these services. Second, the department encourages insurers to consider the distribution of low-cost, commercially available at-home test kits for things like asbestos and other smoke-damaged contaminants as a reasonable first step in responding to and investigating certain smoke-damaged claims. Then, depending on the results of these at-home test kits, further investigation and processing may be warranted. And third, the bulletin addresses the implications of recent court cases on smoke damage claims to stress that whether a particular claim is covered depends on the specific policy language and unique facts of each claim. My colleague Matt will go into these wildfire cases more in depth later, but to close the loop on the commissioner's directive, the cases noted are the California Supreme Court's decision in Another Planet, a COVID-19 case that sets the standard for direct physical loss, and the California Court of Appeals decision in Gharibian v. Wawanesa General Insurance Company, which notably involved ash and soot damage rather than smoke damage. Importantly, the Bulletin 2025-7 emphasized that the Gharibian decision should not be interpreted and applied as a blanket rejection for coverage of smoke damage. Rather, where a particular claim is covered depends on the specific policy language and the unique facts of each claim. This directive can be seen to ensure that claims are not dismissed based on superficial inspections, and insurers must now provide detailed documentation and consider the full extent of smoke damage before denying coverage. Any policyholders with questions or concerns about their smoke damage claims are encouraged to contact their insurance company or the department directly. 

Nick: Thank you. And our fourth point is approval of the $1 billion assessment to support the fair plan. And my question is, how is California supporting high-risk policyholders? 

Kya: Sure. So the California fair plan was established to meet the needs of California homeowners who were unable to find insurance in the traditional marketplace. It is a syndicated fire insurance pool comprised of insurers licensed to conduct property and casualty business in California. Last month, the Fair Plan Association reported that it had paid more than $914 million to policyholders to cover claims related to the Palisades and Eaton fires. The Fair Plan's accounting subcommittee and governing committee each recommended an assessment of $1 billion to enable the Fair Plan to access additional available layers of reinsurance and maintain operators. To address this, the Commissioner approved the $1 billion assessment on member insurance companies to stabilize the program. This step by the Commissioner is meant to ensure that homeowners in fire-prone areas can still access insurance, even as private insurers scale back their offerings or leave the market entirely. But for a more extensive list on what the Insurance Commissioner has ordered or recommended, please review Reed Smith's 2025 California Wildfires Relief Resource Guide, which is available on our website. 

Nick: We're now going to move into our second segment, which is areas that are ripe for focus. And I want to start with mudslides and post-fire risks. And Matt, would you be able to tell us why mudslides often follow wildfires and what homeowners should know about that possibility? 

Matt: We've seen, and people in California have experienced this before, anyone who is living around the Montecito area after the Thomas fire knows all too well the risk of mudslides and why fires can lead to that extremely dangerous, extremely life-threatening problem. You know, you have a situation where, you know, all the vegetation on the side of a hill or in a particular area may be burned away. And what you're left with is a lot of loose material. And then once you get large rains, as happened after the Thomas fire, you can have devastating problems. Most homeowners policies and a lot of business policies as well, will speak to the issue of whether mudslides are covered, usually in the context of earth movement. And you're either going to find that peril excluded or you might find coverage for it depending on the particular policy. So from the perspective of policyholder, always understand what your coverage is. And if you have questions about it, speak to someone who can explain it to you. 

Nick: And is there anything policyholders can do to try to ensure that they are covered for this mudslide risk? 

Matt: Right. I mean, make sure that you're documenting all your damage. I mean, if you have wildfire damage documented early, make sure that you have all the evidence gathered that you can, whether it be pictures, videos, if it's possible to have, if you have smoke or soot or ash damage, have a hygienist come out if that's possible. Your insurance carrier often will send someone like that out if you're reporting that type of damage and make sure that that's done as quickly as you possibly can. And we're going to talk about, when we go into some of these cases that Kya mentioned, we're going to talk about why that's important. Also think about flood insurance. I mean, if you may be in a situation now as we're sitting a couple months out from the fires where it may be problematic to add that risk on, but in the future it's something you should consider because oftentimes flood insurance will have provisions that cover mud flows. So understanding the type of coverage you have is important and then documenting your damage as soon as possible is always a good idea. 

Nick: Yeah, I would just say I always tell policyholders that we're cursed and blessed to have mobile video units in our pockets where we can, if you're unfortunately have one of these horrible losses, you can, you know, as Matt was just saying, document, take video, whatever you can to show what the loss was. 

Matt: And don't be shy with your insurance carrier either. The sooner you're telling them about whatever issues you're having, the better. 

Nick: Absolutely. All right, great. Now I want to ask Kya about smoke damage remediation. And in particular, you were just talking about some of the cases that discussed COVID-19 losses, smoke losses, ash and soots. I want to ask you, how does smoke damage differ from some other types of property damage? 

Kya: So often when we think about what covers a house, we can think about dust and debris, and those are things that simply can just be wiped away. Smoke damage, on the other hand, involves microscopic particles, and they penetrate porous materials such as drywall, insulation, fabrics, other materials. Smoke damage can leave behind corrosive residues, leave persistent odors, and chemical changes to the property itself. So this makes remediating a property a bit more complex when it involves smoke damage and often requires specialized cleaning techniques and oftentimes material replacements. As Matt will get into later, smoke damage is physical damage. Judge Corley of the Northern District of California in Bottega v. National Surety concluded that smoke causes physical contamination that can alter property. 

Nick: All right, great. And Matt, I wanted to ask you if you could explain to us what the distinction is between an accessible property and a habitable one and why that's important. 

Matt: Right. So this deals with not necessarily the structural integrity of the property, but whether it's safe to be inside of, or if you're a business, whether it's safe to operate your business. The case law, even after a lot of developments during and following the pandemic, still generally says that if your property is structurally sound yet uninhabitable for reasons that have to do with contamination, that is still considered physical loss or damage. The issue then becomes, what is contamination? Does COVID-19 contaminate the property? Does smoke contaminate the property? Does soot and ash contaminate the property? That's where the battle lines really have been drawn in these cases. And again, you're going to have carriers arguing that a structure can still be accessible to avoid paying for further remediation. And we've seen that play out even in cases before these current fires. So that's going to continue to be an issue as we go forward. 

Nick: All right. What about cleaning versus taking it down to the studs? Kya, can you tell us when is simple cleaning sufficient versus requiring a full teardown? 

Kya: Yeah, that's a good question. Surface level soot and some minor smoke damage can sometimes be addressed through deep cleaning, air filtration, and repainting. But when smoke damaged particles seep into the walls and the insulation and the HVAC systems, this kind of simple cleaning is just insufficient. So taking it down to the studs just simply means removing all impacted materials down to the framework to ensure that no lingering toxins remain. This is particularly important in cases where prolonged exposure to smoke has led to irreversible chemical changes in the property materials and the soil. 

Nick: What about rebuilding after a loss? What should homeowners do after their claim has been submitted? 

Kya: So immediately after the incident, and Matt and Nick, you both touched on this, the policyholder should take detailed images and photos of the damage caused by the smoke, ash, and soot and submit these forward to the insurer with the claim. Likewise, after submitting the claim, policyholders should keep detailed records of all communications with the insurer. They are recommended to get a contractor estimate, if not multiple, for rebuilding their home to ensure they receive fair compensation under their claim. And this also can include maintaining comprehensive records of all cleaning and repair activities, including dates, costs, and the extent of the work done. Any reports from third-party experts might also be helpful to substantiate the claim. If possible, the policyholder should avoid taking remediation actions without at least notifying their insurer and giving them an opportunity to inspect the premises and consent to the plan work before moving forward. And of course, if the policyholder experiences delays with their company, their insurance company, they may need to escalate their claim with the state insurance department or seek legal advice. 

Nick: Okay, and are there any steps homeowners can take to ensure they receive full insurance benefits for rebuilding? 

Kya: Well, policyholders should definitely review their policy to understand their coverage limits, and this includes any additional living expenses or ALE for temporary housing, and they should also ask for policy extensions if any reconstruction is going to take longer than expected, and this is particularly important to ensure that they are compensated for any sort of code-compliant upgrades required by their local building laws. 

Nick: Great. We're now going to go to our third segment, and this will be a discussion of some of the recent case law that we've already mentioned a couple times so far, but right now I want to turn it over to Matt and if you would talk about how some of the recent legal cases impact insurance claims on smoke damage. 

Matt: So Kya's already mentioned these cases. They are the Bottega case from the Northern District Californian Federal Court and the Gharibian case from the Second Appellate District, which is California State Appellate Court. One of the things that lawyers always talk about is bad facts make bad law and good facts make good law. And these cases are prime examples. You heard Kya talk about the commissioner's bulletin in relation to Gharibian. When I talk about that case, it really is going to ring true why the commissioner is now telling all these carriers that you can't use that case as grounds to deny smoke claims. Bottega is interesting because it's a business interruption claim. Bottega is a restaurant in Yountville in Napa Valley. They suffered smoke and soot damage from the 2017 North Bay fires, and they had to close for about 10 days. Now, their business closed. In other words, they couldn't serve customers, but they actually were able to clean all the smoke and soot off their restaurant really in about a day. And then they started serving first responders. This is all noted, by the way, in the opinion. It gives you a sense of where the case might be going. So they immediately submitted a claim for business interruption of about $108,000. And then a year later, they had an industrial hygienist who came to the property and identified smoke damage. So from a policyholder's perspective, this is exactly what you want to do. I mean, these are good facts, right? This is how you would want to see a claim handled. Maybe you could have the hygienist out there a little bit sooner, but you still want a professional doing that work. So there were two real issues that I think are worth discussing that Judge Corley focused on in finding that, yes, this is a covered loss. The first, and it's important, I think, as we talk about these wildfire cases, California law, at least under a business interruption policy requires that the operations of the business be completely closed or a complete cessation of operations. Yes, the court found there was a complete cessation of operations here, even though the smoke was able to be clean and even though the restaurant was still serving first responders within 24 hours. The key here was they couldn't operate a business. There were restrictions on access to the property in addition to the fact that fires were still burning nearby. But the key issue and why the case is important is that it looked at some cases from the COVID-19 context. It didn't really mention Another Planet, even though that's probably the most important case in California on the issue. And really it said, listen, in light of these cases, there's got to be some physicality to the loss, right? Whether it be physical alteration, physical contamination, or physical destruction, right? It can't just be something that doesn't cause a physical problem for the property itself. And the other thing that's very important in this case is what actually happened in the litigation was extremely important. The carrier national casualty admitted in discovery responses that the smoke damage caused physical loss or damage. Then when it came time to actually decide on motions for summary judgment, whether Bottega could win the case, it argued the opposite. And any lawyer can tell you that most federal judges are not going to like that. And Judge Corley was no exception. So what I find interesting as a lawyer who practices in Florida is Judge Corley cited one of my least favorite cases from Florida, which is a case called Mama Joe's, also involving a restaurant about five miles south of where I'm sitting right now in Coconut Grove in Miami, that filed a business interruption claim because of the presence of road construction dust on its restaurant. The federal judge down here in Florida, Judge Moore, and then the 11th Circuit said, you can just wipe away construction dust. This doesn't actually cause any physical alteration to the property. And here, Judge Corley in Bottega said, you know, COVID is more like construction dust. But smoke is more like asbestos or some type of gas that would physically alter or contaminate the property. And from my perspective, I'm interested to hear if Nick or Kya have anything to add. That analysis is exactly right, but it's important. What was very important here was the industrial hygienist opinion backing that up. I mean, lawyers are not scientists. I can't sit here and tell you with any type of certainty how smoke and soot and ash physically affect the property, but there are people who can. Nick, Kya, anything you want to add to that? 

Nick: Yeah, I would just add that it's always helpful to have scientific evidence or experts to support your opinion on the facts. Obviously, not all homeowners are going to have access to that, but to the extent you can, to the extent you can find resources that would bolster the science that can make these distinctions that, as Matt just described, can be dispositive to whether you get coverage or are denied. 

Kya: I agree with what Nick said, and I think where possible, getting various expert opinions, not only in different areas, but on the same type of smoke damage, I think that that could really benefit bolstering the claim to say that this smoke damage did cause physical loss. 

Matt: Right, and that's a perfect segue to what happened in Caribbean, which was very different. So, Gharibian was a homeowner's claim from the 2019 Saddle Ridge Fire in LA County. Again, like the property in Bottega, the fire did not burn the house, but there was some debris and soot and ash and smoke damage, or at least the smell of smoke. The insurer testified that two months later, the smell of smoke was gone, and they did all the cleaning of the property themselves. They also hired an attorney within weeks of the fire who wound up handling the whole process, the whole claims process for them. The carrier, Wawanesa, came out, prepared a cleaning estimate, was willing to pay several thousand dollars for that. The insured never took the carrier up on that work. Then there was an industrial hygienist who was hired by the insured, found the presence of soot and ash, but opined that the presence itself of those materials did not physically damage the structure. So again, the carrier said, all right, well, you have soot and ash, we'll offer you some money. In this case, they revised their estimate for cleaning upward to $20,000 and the insured never used that money. So again, from the perspective of the court, these are not great facts, right? You have an expert who's not giving the opinion that can support a finding of physical loss or damage, and you have an insured who's not really taking the opportunity to back up what they're saying by putting their money where their mouth fits, for lack of a better term. So the court, in deciding whether or not this was physical loss or damage, cited another planet for the standard under California law, which is there's got to be some injury or impairment to property. And also found that that standard is not limited to COVID-19 cases, but then said, listen, there's no evidence of this on these facts. You have an insured who said there was no noticeable smoke within two months. You have an expert who did not find the presence of actual damage. And you have a situation where everything was cleaned without the need for any, from the insurance perspective, without the need for any experts or specialists. So, you know, the insured tried to argue that prior payments. Prior offers or payment were somehow relevant. The court said, no, that's not enough. Those payments were made under reservation of rights. So, you know, takeaways for me, policy language always matters in these cases and facts always matter. You're not going to be able to get away from the type of facts that are unique. And that's why, you know, Commissioner Lara has said you can't rely upon Caribbean because it's a unique circumstance to just summarily deny these claims. But in a situation where you have facts like Caribbean, you have to be careful. Nick, Kya, anything to add to that? 

Kya: Yeah, I mean, we're sitting here now three months into 2025, and you have gone through two cases that have the opinions been issued in 2025. So we have these two opposite ends of the spectrum that policyholders now have these guns in their holsters to differentiate their facts between these two sides of the spectrum. And I think it's a really important time for policyholders to be aware of these cases and how they can use them to help argue for coverage under their own claims. Nick, anything to add? 

Nick: No, I just think that everything that you guys have said is spot on. The facts matter, and you have to pay extremely close attention and get expert assistance if it's available. All right, so our fourth segment, I'm going to ask Kya. You were just talking about this a bit, you know, arming policyholders to pursue their claims. But what should policyholders do if an insurance company denies their claim, citing a lack of physical damage? 

Kya: Right. So if the insurer denies the claim and says that the smoke or other contaminants do not constitute physical damage, I recommend that any policyholder should first request a written denial letter explaining why the claim was rejected. Receive that from the insurer. Second, as Matt mentioned, gather any sort of expert assessments from industrial hygienists, contractors, environmental specialists to help demonstrate the extent of the physical damage. Third, cite any sort of legal precedents that we discussed today in any claim denial appeal and emphasize how the court ruled in favor of recognizing smoke damage and also differentiate the facts to help your own claim. Fourth, demand a proper investigation from the insurer. This will make sure that the insurer does not dismiss the claim based on any sort of superficial inspection. And finally, file a complaint with the state insurance department if this policyholder believes that their claim and or appeal was unfairly denied. If any policyholder continues to experience roadblocks, my advice is to consult with an experienced coverage counsel to address these issues and determine how they should be repackaged to the insurer. 

Nick: So we are now just going to have a few concluding remarks. I would say some of the important takeaways are to make sure that as a policyholder, you are trying as best as you can to stay updated on legal developments. We saw or was heard earlier today about developments and directives from the insurance commissioner. Kya talked about resources on our website where you can follow along for some of these updates. I wanted to mention again United Policyholders as a resource to not only stay updated on developments, but also to provide support and other resources where possible. And, you know, as Matt said too, facts matter, policy language matter. So make sure you take account of the facts related to your claim, document damages, and the amount of damages. Look over your insurance policy documents as closely as you can. Policy language might change from year to year. Make sure you understand that you have the full policy. You don't just have a declaration page or evidence of coverage. You have the actual policy to look at. You want to advocate for your claim. Make sure you communicate in writing and you get responses from your insurance company in writing. And if you do run into, as Kya just said, roadblocks that become difficult or insurmountable, seek assistance. United Policy holders, other organizations, or counsel to help advocate for your claim. Matt, Kya, anything to add? 

Matt: Agree with everything Nick said. Thank you, everybody. 

Kya: Thank you for joining us. 

Nick: Yeah, thanks very much, and good luck. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith’s Insurance Recovery Group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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