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Insurance! What Is It Good For? Misplaced Liability for California’s Wildfires

It is no secret that California has consistently suffered some of the worst wildfires in United States history.1  Blazes in 2017 caused more than $10 billion in damages, the most in the state’s history.2  The fires, which exist everywhere from Santa Barbara and Malibu to Napa and, most recently, the City of Paradise, destroy houses, businesses, and lives.3  The large-scale cause of the uptick in rate, size, and destruction of these fires is a combination of climate change and housing development in what were previously non-residential areas.4  Despite extensive efforts to curb the catastrophes and develop new firefighting strategies, the regular threat of wildfire is the new normal.5

Although the loss of life is clearly the most tragic and devastating aspect of wildfires in California, the financial costs have been exorbitant, and almost unmanageable.6  Each major fire costs private landowners, homeowners, business owners, and the state and federal government upwards of $1 billion in containment and reconstruction.  Such massive expenses have been the subject of major news coverage; and even the President has complaints about the high governmental expenditures.  7  The compounding costs are making it increasingly difficult for any single party to absorb the expenses.8  These expenses have created a complex and heavily disputed issue in California: Who should pay the bill?

Where this issue has received the most attention is in the context of utility companies, specifically the Pacific Gas and Electric Company (PG&E).9  Sparks from power lines managed by the company have caused a significant number of the recent fires.  Wind, one of the major contributors to spreading wildfires, causes the power lines to shake and make contact with each other.  This contact leads to sparks that quickly spread.  Because PG&E manages all of the power lines in Northern California, it has received consistent criticism for being the direct cause of the fires—even when no mismanagement or negligence is at play.  10

California courts have held that utility companies are entirely liable for damage caused by their equipment.  That standard is known as “inverse condemnation.” 11 Pressure from insurance companies and fire victims has prevented legislation completely absolving PG&E of this liability.  That said, Governor Jerry Brown has made some attempts to protect the country’s largest utility company from bankruptcy.  In September 2018, Brown signed California Senate Bill 901, a new law that determines how much liability a utility company can absorb without triggering bankruptcy—once the company reaches that limit, it can begin shifting costs to the ratepayer.  Senator Bill Dodd has said the average residential ratepayer would pay an estimated $5.20 extra for every $1 billion that PG&E is forced to pay.12

Despite this legislation, Moody’s Investors Service downgraded the credit ratings for California’s three big investor-owned utilities; PG&E has been rated just above junk bond status.13 In the wake of the recent Camp Fire, the company’s shares have dropped by more than 20 percent.  More than half its market value was wiped out in the course of a week.14  As a result of this, some prominent investors are taking a major hit.  Seth A. Klarman bought 14 million PG&E shares just before the recent fire and Viking Global bought 5.7 million. 15 

The entire situation produces several major qualms.  First, it is probably unfair to have all electricity users in California pay for damage that does not have any direct effect on them.  Should rates increase further, manufacturing companies may choose to move out of the state as opposed to paying higher rates, passing even further costs to the residential rate payer.16  Insurance companies often refuse to pay the costs of the damage, which leads to non-affected individuals paying for the insurance costs of those who are affected.  This can and should be viewed as a complete cop out for large insurance companies.  Second, though the strict liability concept does encourage PG&E to make a greater effort in its safety procedures, it is arguably unfounded in reason.  The company received extremely bad press for their negligence in the San Bruno fire of 2010.17  But, that is no reason for unreasonable liability measures now.  As mentioned above, the primary causes of the “new normal” wildfires are climate change (heat, drought, and dryness) and the reality that more people are living in high-risk areas.  The fact that PG&E is subject to liability when it engages in reasonable safety efforts makes little sense.  That liability is what fire insurance is for.

Meanwhile, homeowners’ insurance rates continue to increase, and carriers are becoming less willing to issue policies.18  The fire insurers are using a tactic those familiar with the pre-existing conditions issue in healthcare remember all too well.19  Chris Folkman, senior director at catastrophe modeler RMS, believes the back-to-back severe wildfire seasons will make insurers even more cautious in California, especially in high-risk areas.20  Then, this is what happens: insurers undervalue the reconstruction costs of a home in a high-risk area, the home burns down, and then the homeowner doesn’t have enough insurance to cover the rebuild. 21  When an insurer lies about how much coverage is sufficient to cover reconstruction, it opens itself up to liability in court.  An example of a victim to this practice is former Marine Officer Scott Weiss, who was impacted by the Fountaingrove fire in Santa Rosa, CA.  Weiss lost his home and trusted his insurance agent that he had enough coverage to rebuild—he is about $1 million short.22  Many of these policies only allow an 18-month window for a rebuild, which can leverage the insured to take low settlement offers in order to not miss the window.23

There are legislative efforts to assist the average homeowner such as AB 2594, a bill that extends the right to sue a carrier from 12 months to 24 months.24  This gives homeowners more time to negotiate and work things about before pursuing litigation. 

Despite efforts to help, some insurers are simply canceling policies altogether to avoid facing future risk.25  Mark Sektnan, Vice President of the Property Casualty Insurers Association of America, claims that California insurance companies are “well-regulated, well-capitalized, and heavily reinsured to protect consumers and ensure claims are paid . . . .” 26  Yet, the reported difficulties in collecting sufficient claims and the reported cancelled policies say otherwise.27  Moreover, insurers are not required to report these non-renewals, making it extremely difficult to track and regulate them. 28  Another new bill by Senator Dodd would prevent the non-renewal of a homeowner’s insurance policy for two years after a disaster such as a wildfire, but this may only delay the inevitable.

If insurers leave California, as many did in Florida when Hurricane rates increased, it could shrink the market for new, modestly priced homes and further exacerbate the state’s already notable homeless population.29  Furthermore, it could force homeowners to adopt public insurance plans or out-of-state carrier plans, which are either more expensive or less regulated than private plans.30  Although such fears are reasonable, they may be blown out of proportion.

As with healthcare, the pre-existing conditions clause did not tank the Affordable Care Act.  Similarly, California should not be held hostage by insurer’s threatening to leave.  Properly regulated and priced insurance can remain profitable, especially as better firefighting efforts are developed.31  For instance, companies can charge higher rates, the legislature can mandate coverage in low-risk areas to balance the high-risk areas, or insurers can engage in more accurate and honest valuations to avoid lawsuits.

For better or worse, California’s wildfires are the new normal and not the sole fault of PG&E.  When the company is at fault for negligence, then they should be liable.  When they are not, however, insurance companies and the state of California should pay the bill.  Whether through another financial intervention or by forcing insurance payments through regulation and court orders, a change is needed.  The risk of insurers fleeing the state is less important than people’s lives and the statewide power grid remaining operational.  California needs to find a balance between a proper power supply, wildfire safety, and the protection of ratepayers. 

This blog contends the solution is more coverage, proper valuations of property, better planning, state and federally funded relief efforts, and as a last option—passing the costs from the utility to the ratepayer.  But, if there is no negligence at play, there should not be strict liability for utility companies.  Californians demand electricity and PG&E provides it.  Despite what some may view as a bailout for PG&E, it is a necessary evil.


  1. Why Can’t California Control the Wildfires?, BBC (Oct. 15, 2017), https://www.bbc.com/news/world-us-canada-41627751

  2. Gov. Brown Signs Law Allowing Utilities to Charge Ratepayers for Costs Related to 2017 Wildfires, CBS Sacramento (Sept. 21, 2018, 11:46 AM), https://sacramento.cbslocal.com/2018/09/21/jerry-brown-pge-wildfires-charging/

  3. Kendra Atleework, Power Lines Are Burning the West, The Atlantic (May 25, 2018), https://www.theatlantic.com/technology/archive/2018/05/power-lines-are-burning-the-west/561212/

  4. Max Moritz, Naomi Tague, & Sarah Anderson, Wildfires Are Only Going to Get Worse, So We Need to Alter Our Strategies Now, MarketWatch (Aug. 15, 2018, 11:01 AM), https://www.marketwatch.com/story/wildfires-are-only-going-to-get-worse-so-we-need-to-alter-our-strategies-now-2018-08-14

  5. See Atleework, supra note 3. 

  6. Brittany Shoot, How Much the 2018 California Fires Have Cost (So Far), Fortune (Aug. 1, 2018), http://fortune.com/2018/07/31/worst-california-fires-cost-carr-fire-ferguson-2018/

  7. Chris Nichols, California Wildfire Made Worse by Hot, Dry Conditions, Not Water Policy, as Trump Tweeted, POLITIFACT (Aug. 6, 2018, 4:15 PM), https://www.politifact.com/california/statements/2018/aug/06/donald-trump/california-wildfires-made-worse-hot-dry-conditions/

  8. See Ivan Penn & Peter Eavis, California Utility Customers May Be on Hook for Billions in Wildfire Damage, N.Y. Times (Nov. 14, 2018), https://www.nytimes.com/2018/11/14/business/energy-environment/california-fire-utilities.html

  9. See Jeff Daniels, ‘Pretty Overwhelming’ Evidence Against PG&E in deadly Paradise Fire, Says Attorney Suing CA Utility, CNBC (Nov. 14, 2018, 7:00 PM), https://www.cnbc.com/2018/11/14/overwhelming-evidence-against-pge-in-deadly-fire-says-lawyer-suing.html

  10. CBS SACRAMENTO, supra note 2. 

  11. Id

  12. Id

  13. Id

  14. Penn & Eavis, supra note 7. 

  15. Id

  16. Id

  17. Kate Larsen, PG&E Receives Maximum Sentence for 2010 San Bruno Explosion, ABC News (Jan. 26, 2017) https://abc7news.com/news/pg-e-receives-maximum-sentence-for-2010-san-bruno-explosion/1722674/

  18. Don Jergler, How Insurance Industry Might React to ‘New Normal’ of California’s Historic Wildfires, Insurance Journal (Nov. 13, 2018), https://www.insurancejournal.com/news/west/2018/11/13/507414.htm

  19. Yuval Rosenberg, Why Protections for Pre-Existing Conditions Are Such a Potent Political Issue, The Fiscal Times (Sept. 5, 2018),  http://www.thefiscaltimes.com/2018/09/05/Why-Protections-Pre-Existing-Conditions-Are-Such-Potent-Political-Issue

  20. Jergler, supra note 17. 

  21. Id

  22. Wayne Freedman, Victims of North Bay Fires Speak Out at State Insurance Committee Meeting in Napa, ABC News (Oct. 30, 2018),  https://abc7news.com/state-insurance-committees-hear-from-fire-victims/4584163/

  23. Id

  24. Don Jergler, Will California See More Laws and Regulations in Wake of Wildfires?, Insurance Journal (Nov. 13, 2018), https://www.insurancejournal.com/news/west/2018/11/13/507395.htm

  25. Ed Leefeldt, California’s Fires Are Creating Another Problem: Fleeing Insurers, MoneyWatch (Aug. 6, 2018, 5:30 AM), https://www.cbsnews.com/news/california-wildfires-property-insurers-cancel-policies-because-of-risk/

  26. Id

  27. Michael Finney, Proposed Bill May Protect Homeowners From Losing Fire Insurance, ABC News (Feb. 5, 2018), https://abc7news.com/proposed-bills-may-protect-homeowners-from-losing-fire-insurance/3038885/

  28. Id

  29. Id

  30. Id

  31. California Fire Plan, CAL FIRE, https://calfire.ca.gov/communications/downloads/fact_sheets/FirePlan.pdf (last visited Dec. 1, 2018. 

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Jacob Muller