California is in the midst of one of the worst droughts on record. In January 2015, Governor Jerry Brown issued an executive order that requires cities and towns to reduce water use by 25%. The $45 billion agriculture industry was spared from the mandatory water reduction, but nonetheless, the drought is expected to cause $2.7 billion in agriculture industry losses.
An important additional threat to California's economy is the increased risk of wildfires following from both the drought and the water use controls. Over recent decades, wildfires have caused massive damage in California. According to one study, California is home to "[m]ore than 80% of all wildfire insured losses in the period 1980–2011 and the five costliest wildfire events for the insurance industry[.]"
The current drought conditions have created an even greater risk of catastrophic wildfires. The insurance industry recently warned that "the potential for wildfire has reached a peak that could cause $237.3 billion in property damages in high-risk areas." This risk is exacerbated by commercial and residential development in rural areas that are more prone to fires than urban areas. And as of July 11, 2015, the California Department of Forestry and Fire Protection recorded almost 1,000 more wildfires than during the same time period in 2014.
Considering these depressing statistics, it is important for companies to manage their wildfire exposure by maximizing insurance coverage, to the extent practicable; obtaining as much coverage for wildfires as is possible in current policies; remaining alert to proposed changes in their insurance programs; and scrutinizing coverage available through subcontractors.
Take Stock
Companies should review their existing insurance policies before a wildfire occurs to determine which policies may provide coverage for different types of wildfire-related damages. Commercial general liability policies and "all risk" property policies may respectively provide coverage for third-party liability and first-party property damage arising from wildfires, including damage to facilities and equipment. As discussed below, while the insurance industry has limited the coverage available for this type of loss, it has not excluded it completely.
In addition, wildfires may disrupt operations and force temporary closures. If a company is directly impacted by a wildfire, business interruption insurance may cover lost profits and related costs. Be sure to confirm this is covered. For a company not directly impacted by a wildfire, contingent business interruption coverage may apply, if purchased. Thus, if a wildfire damages the property of your supplier, customer, or other business partner, and your operations are impacted as a result, coverage could be available under contingent business interruption policies. This too should be checked.
Be Vigilant Regarding Changes in Existing Insurance Programs
Companies should be cautious of any insurer-proposed changes to existing policies. In response to the California wildfires in 2004, 2007, and 2008, insurers began dramatically limiting wildfire liability coverage in some industries and offering substantially less insurance at a much higher price. Insurers may react to the current drought conditions by attempting to negotiate lower wildfire sublimits or by inserting exclusions that bar coverage for damage caused by wildfires. Companies should review their renewal wording carefully, and work with their brokers to reject any such proposed restrictions.
Scrutinize Subcontractors and Their Coverage
Plaintiffs usually pursue the defendant perceived to have the deepest pocket. But those with the deepest pockets also have the power to protect themselves contractually. Subcontractors, for example, may cause a wildfire but their policies could also provide additional insurance protection. Illustratively, an electric utility employing a vegetation management subcontractor to keep utility lines free of brush could be held liable in the event the subcontractor causes a fire. You should ensure that your subcontractors are adequately insured and have purchased coverage for wildfire losses. As a further safeguard, subcontractors should be required to add your company as an additional insured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
