Risk Management and Smoke Damage Claims in the Wake of the Los Angeles Wildfires

Risk Management and Smoke Damage Claims in the Wake of the Los Angeles Wildfires

The ongoing wildfires in Los Angeles have displaced thousands of residents and damaged businesses. However, according to an article by Risk Management Magazine, even without direct fire damage, businesses may recover losses from smoke damage under their insurance policies. 

However, insurers sometimes challenge these claims, citing COVID-19-era rulings that dismissed virus-related losses as physical damage. Courts have consistently ruled that smoke, soot, ash, and noxious gases constitute property damage and are covered under commercial insurance policies.

The article highlights a recent California federal court decision, Bottega LLC v. National Surety Corporation, reaffirming this precedent. The court held that smoke infiltration from wildfires caused physical damage, referencing past rulings that contamination impairing a property’s function qualifies as a direct physical loss. The insurer unsuccessfully argued COVID-related case law, which courts have deemed inapplicable to smoke damage. The court also highlighted the distinction between temporary contamination, like viruses, and physical alterations caused by smoke, which may render a property unusable.

The article mentions other cases that echo this reasoning. In Oregon Shakespeare Festival v. Great American Insurance Co., wildfire smoke was found to constitute physical damage when it made a theater uninhabitable. Similarly, in West Fire Insurance Co. v. First Presbyterian Church, gasoline vapors rendering a building uninhabitable were ruled a covered loss. These decisions emphasize that insurance policies have long recognized smoke damage as a covered peril.

Despite insurers’ attempts to apply COVID-era interpretations to wildfire-related claims, longstanding judicial precedent supports coverage for smoke damage-related losses. Risk managers should proactively assess potential exposure by documenting smoke-related impacts, such as air quality data, damage to HVAC systems, or lingering odors that impair usability. 

They should also review insurance policies to confirm coverage, identify exclusions, and gather supporting evidence like photographs, repair estimates, and business interruption data. Partnering with legal counsel and forensic accountants can strengthen claims. Planning ahead ensures policyholders can respond to insurer challenges and recover losses efficiently.