Southern California’s Wildfire Disaster: Immediate Insurance Considerations

As of January 13, Southern California’s ongoing wildfires have reportedly destroyed more than 12,000 structures. Insured loss estimates exceed $25 billion, and the strong Santa Ana winds fanning the blazes are expected to continue into Wednesday.

Based on decades of experience in prior catastrophes, we know that for some, the process of insurance claims will take years to resolve. For now, displaced policyholders should first look after the safety and immediate well-being of themselves and their families. Next, policyholders should take preliminary steps to realize the insurance benefits they have long paid for.

1. Gather All Available Insurance Policies
   It is critical to gain a solid understanding of the coverages you have and any potential gaps early in the process.  If your policies were lost with your home or business, contact your broker or agent to obtain copies, and keep in mind that most policies are now available electronically through your insurer. Homeowners, property, and automobile are the most likely coverages triggered.The fires primarily caused damage to residential areas, and the early information suggests that most insured losses will be under personal lines (as opposed to business lines).  See points 8 and 9 below for a few pointers specific to business insurance.
2. Provide Notice to All Potentially Pertinent Carriers
   Policies often contain conditions to coverage that require notice within a certain time frame, e.g., “as soon as practicable.” Notice need not be detailed but be prepared to provide your policy number and to identify what is known at the time about the general nature of the loss, such as whether the house was completely destroyed. Notice may be provided through your broker or agent. If you intend to incur major expenses to mitigate or reduce your loss, inform your carrier of this and seek prior consent, if possible.

3. Ask About Temporary Housing
   If your home is destroyed or uninhabitable, inquire about additional living expenses (ALE) coverage. This can help you pay for temporary housing like hotels or rental homes until your property is repaired. Terms vary, but often ALE coverage will extend to as much as half the face amount of your homeowners policy limit. Again subject to your policy terms, you may be afforded living expenses for a comparable home. Note, however, that what constitutes a comparable home may be a challenging issue for many homeowners given what will be a very tight rental market for many displaced homeowners.

4. Review Policies for Potential Coverage
   When it comes to fire and wind damage, homeowners’ policies typically provide coverage, but understanding your policy is key.Here’s a closer look at what your coverage often provides:

• • Dwelling Coverage: This covers the structure of your home. If your home was destroyed or significantly damaged, your insurer may pay for repairs or rebuild it based on your policy limits.
  • Other Structures Coverage: This covers detached structures, such as garages, sheds or fences on your property.
  • Personal Property Coverage: This helps replace damaged or lost personal belongings. However, some items may have limits (for example, jewelry, art, or electronics).
  • Loss of Use Coverage: As noted above, if your home is uninhabitable, your ALE coverage can help cover the costs of living elsewhere during repairs or reconstruction.
  • Replacement Cost Coverage: Homeowners polices can provide insurance on different bases ranging from the actual cash value of the improvements to full replacement cost including increased costs resulting from building code upgrades. The type of coverage you purchased can materially impact efforts to rebuild.

5. Document Your Losses
   Documenting the damage is crucial to filing an insurance claim and ensuring you receive appropriate compensation. Photograph and keep careful notes of damages to your property. Where your home is a complete loss, start a room-by-room list of the contents, including furniture, art, jewelry, cars, bikes, garden equipment and the like.Although it may be tempting to clean up the debris, avoid making significant changes to the property or cleaning up fire-damaged areas until an insurance adjuster has assessed the damage. This ensures that your insurer can fully evaluate the loss.

6. Identify Potential Coverage Issues Early
   For many homeowners with standard homes and adequate limits the claim process may be relatively straightforward. But there will be some percentage of homeowners who will face insurer resistance on certain issues and disputes. The likelihood of disputes depends on the specific policy terms and the claim-specific facts, and it is difficult to predict all the ways in which disputes can arise.  However, we anticipate the following as being potentially common areas of dispute:

• • Different Limits/Sub-Limits: As mentioned above, many policies have different or lower limits applicable to certain types of property. This structure provides an insurer with the opportunity, and perhaps an incentive, to characterize debatable property as coming within certain limits that reduce the claim payment. Gaining an early understanding of what the different coverages and limits are can be critical to preserving the value of your claim.
  • Business Exclusions: Many or most homeowner’s insurance policies contain an exclusion for business use.  Given the pandemic-related blurring of the line between home and business for many people, insurers likely will be focused on identifying (and denying coverage for) property they believe might have been used in the insured’s business.
  • Expensive / Difficult-To-Value Property: Homeowners with expensive finishes, furniture, home theaters, handbags, jewelry, art, vehicles and other property are likely to face insurer resistance to paying the full value of such items.  While some of these issues may be avoided or limited due to the property being separately insured or scheduled, many times that is not done and insurers may question values even on separately-insured property.

7. Engage Appropriate Experts
   It’s usually prudent to engage professional claim consultants, such as forensic accountants, particularly 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 generally well-intentioned, but do not always have the resources or expertise you need in pursuing your coverage rights.

8. Business Insurance Policies
   Like homeowners’ policies, commercial policies almost universally provide fire coverage.  That said, 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.Businesses also have a potential for insurance under other parties’ insurance.  A business facing a fire loss therefore should gather any insurance certificates or policies that may have been supplied by a contractor, transporter, a lessee or a customer, that may also provide coverage to your business.

9. Evaluate Your Business Interruption and Contingent Business Interruption Coverages for Potential Issues
   For those experiencing damage to their business, your policy should cover your extra expenses and 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 other parties’ 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.For those experiencing fire damage to their business, understanding and documenting the timing of your additional expenses and income loss may well turn out to be the most important step you can take to maximize coverage.  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.  Many times it is necessary to retain a forensic accountant to assist in this process.The business interruption portions of your policy will likely include a waiting period, stated in terms of a number of days or weeks—ranging from 1 to 45 days—before business interruption coverage applies. 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, which 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 will 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.

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.

Wildfires and windstorms are unpredictable, but by knowing what steps to take after a fire or windstorm, you can take control of the situation and start the process of rebuilding.