Background

In January 2025, the Los Angeles metropolitan area experienced a series of seven devastating wildfires. These included the Palisades Fire that burned over 23,400 acres in Pacific Palisades and the Eaton Fire that burned over 14,000 acres north of Pasadena. These fires are the most destructive in the history of Los Angeles and rank amongst the top five most destructive in California’s history. Many of these fires burned throughout the month and were only fully contained on February 3, 2025. While the official cause of the fires have not yet been determined, the drought-like conditions and seventy miles per hour offshore winds that hit Southern California resulted in weather that was described by the National Weather Service as “about as bad as it gets.”

It is estimated that total insured losses will fall between $28 billion and $35 billion[1], making it one of the costliest wildfires in U.S. history. According to the California Department of Insurance, over 37,000 claims have already been filed for homeowner and commercial property policies[2]. Due to the nature of these fires, there are several factors that will make these claims challenging to measure and adjust.

Multiple Occurrences & Different Triggers of Coverage

As is typical with wildfire events, there has been a resulting deluge of smoke damage claims from areas in proximity to the fires that may not have suffered direct physical damage from the fire itself. The complexity in this incident is that there were several different fires burning in close proximity to each other, meaning that insureds potentially suffered smoke damage from multiple different fires. In addition, many insureds may have had multiple owned locations impacted by different fires and in different ways. This brings in the multiple occurrences of loss issue, which can impact the claim adjustment as each may have separate deductibles, separate limits, etc. Furthermore, multiple occurrences with different dates of loss and/or different triggers of coverage could add extensive complexities to the business interruption measurement.

Due to the extensive impact of the fires, even insureds that had one single location impacted by one single fire have been affected by multiple triggers of coverage. For example, businesses may have experienced losses for some or all of the following reasons:

• Civil Authority
• Ingress/Egress
• Off-Premises Power Failure
• Physical Damage

For each of the different triggers of coverage, there is potential for varying deductibles, limits, and/or period of indemnity considerations relating to each category of loss, which can make the adjustment, especially the business interruption, highly complex.

And, just when you think it cannot get anymore complex, enter the coverage trigger of contingent business interruption. When it comes to potential multiple occurrences and/or multiple triggers of coverage at suppliers, customers, or other key third parties for which the insured relies-upon, the issues can be compounded when approaching contingent business interruption losses.

With regards to triggering coverage, with interesting timing, on February 7, 2025, The California Court of Appeal, Second District, affirmed the trial court's summary judgment in Gharibian v. Wawanesa General Insurance Company (WGIC). The case stems from the 2019 Saddle Ridge fire. The appeals court ruled that mere smoke, ash, or soot damage, without a distinct, demonstrable physical alteration to the property, does not automatically constitute "direct physical loss." In response, on March 7, 2025, the California Department of Insurance issued Bulletin 2025-7, which effectively stated that the Gharibian v. WGIC case does not distinctly remove coverage for smoke damage claims, rather the bulletin heightened the standards for insurers to investigate smoke damage claims in good faith. It remains to be seen what implications this ruling has with regards to the Los Angeles fires.

Soaring Construction Costs

After a major incident like the Los Angeles fires, there are tens of thousands of homeowners and businesses rushing to mitigate, cleanup, and rebuild. This predictably results in soaring costs of construction in a regional area where construction costs are already high.

As thousands of properties need to be rebuilt, there will likely be a bottle neck of contractors and skilled workers available to work on the reconstruction. This will lead to delays in project timelines and opens the opportunity for contractors to price gouge. Furthermore, a sudden increase in demand for materials like concrete, steel and wood increases material costs. There will also be potential for the local government to get flooded with permit and inspection requests resulting in long delays in permit approvals, certificates of occupancy, etc.

In a location like Los Angeles, where construction costs are already extremely high, these factors could lead to a situation where insureds are severely underinsured. Construction estimate contingencies of 40% - 50% are already being put in place for potential increased construction costs. In addition, longer repair periods will result in more extensive business interruption losses.

Insured Representation

As is the case with any catastrophe, extensive damage attracts public adjusters and plaintiff attorneys into the picture. What is notable is that, in the aftermath of the Los Angeles fires, there have been reports of public adjusters putting in place agreements entitling them to 40% of the insureds’ total settlements. This is a massive increase from the typical agreements ranging from 5 – 15% and will only exacerbate problems with the spiking construction costs potentially driving losses above policy limits, collectively potentially resulting in insureds’ net recovery to be disastrous. And, of course, this increases the potential for further litigation.

Conclusion

The Los Angeles fires caused widespread devastation and are some of the costliest in U.S. history. Adjustment of the ensuing flood of claims will be complicated by the likelihood of instances of multiple occurrences and multiple triggers of coverage. Additionally, spiraling construction costs and high fee agreements with insured representation run the risk of there being a significant gap between actual loss sustained and net recovery.

While it remains to be seen, the Los Angeles fires could change the insurance industry. Insurers have always generally considered wildfires to be a “secondary peril,” meaning that they posed a lesser financial risk than the likes of hurricanes and earthquakes. However, the way the industry views wildfire risk began to change in 2016, with the Fort McMurray wildfire in Alberta. Since that time, the severity and cost of wildfires has risen dramatically year-over-year. With the change in trends, prevention (or lack thereof), climate, forecast modeling, etc., the Los Angeles fires, collectively, have the potential to serve as the event that changed the way insurers approach insuring wildfire risk.

[1] https://www.verisk.com/company/newsroom/verisk-estimates-industry-insured-losses-for-the-palisades-and-eaton-fires-will-fall-between-usd-28-billion-and-usd-35-billion/

[2] https://www.insurance.ca.gov/01-consumers/180-climate-change/Wildfire-Claims-Tracker.cfm

This article was co-authored by Michael Vannucci and Hannah Dingley.