Wrongful Denial of Coverage from Wildfire Revenue Loss
Wrongful Denial of Coverage from Wildfire Revenue Loss
By David A. Gauntlett*
Introduction
In the recent Los Angeles wildfires, many businesses suffered direct fire damage, up to and including being entirely burned to the ground. For those so impacted, coverage should be a straightforward issue under any standard Business Owner’s Policy (“BOP”). It is critical, however, for such policyholders to seek all benefits to which they are entitled. While many rightfully expect coverage for the actual damage to the business property, standard policies also include coverage for business interruptions. These “Business Income” provisions can expand coverage to those suffering a sort of “secondary” impact from the fires (i.e., businesses that did not suffer fire damage but have experienced decreased revenue due to loss of access and other circumstances).
Standard Policy Language
A standard Insurance Services Office (“ISO”) BOP form[1] includes the following provision for business interruption coverage:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration”. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.[2]
The policy definitions also provide that “suspension” includes “partial slowdown . . . of your business activities.” Notably, this coverage is not subject to the policy’s Limits of Insurance. This coverage is also expanded by a “Civil Authority” provision:
When a Covered Cause of Loss causes damage to a property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises . . . .[3]
Calculating Recovery
Policy language will dictate the determination of “Lost Income.” Two methods are employed. The first, often called “gross receipts,” determines “Lost Sales” as the difference between “Projected Sales” and “Actual Sales.” This is the baseline recovery. It is reduced by any expenses that were saved due to reduced business operations.
The second method, often called “net income,” requires calculating the “Lost Net Income,” the difference between “Projected Net Income” and “Actual Net Income.” Any operating expenses are added to the Lost Net Income to determine recovery.
A competent CPA or forensic accountant is typically employed to calculate the “projected” amounts.
Recent Fire Decision Suggests Coverage Is Available
Earlier this month, Bottega, LLC v. Nat'l Sur. Corp.-Chicago, IL[4] addressed a factually analogous scenario related to fire in 2017 in Napa, Sonoma, and Yuba Counties. The plaintiff policyholder owned several restaurants that were “very close” to the fires but not within the actual burn area.[5] As part of the state of emergency, various road closures were implemented from approximately October 9 to 18, 2017 that restricted access to the restaurants. The insurer paid these claims pursuant to the “Civil Authority” provision, but denied claims for lost income after the road closures were lifted.[6]
The court determined four elements had to be established by the policyholder: “(1) a suspension of operations (2) caused by (3) direct physical loss of or damage to the property, (4) resulting from a Covered Cause of Loss.”[7] The court briefly addressed elements 1, 3, and 4, concluding that they were all easily satisfied. The causation element was more complicated, and the court determined it could not be addressed on summary judgment. Nevertheless, the court’s analysis provides relevant insight for those seeking coverage in similar situations.
The coverage dispute boils down to whether a reasonable trier of fact can or must find a causal connection between the smoke damage and Bottega's suspension of operations on at least October 9, 2017. . . .
Plaintiffs adduced evidence from which a reasonable juror could conclude smoke, ash, and/or soot damage caused the suspension of operations at Bottega. Michael Chiarello, the 30(b)(6) witness and owner of Plaintiff businesses, testified Bottega closed because the “facility prevented customers from coming ... because it smelled like an ashtray.” [citation] [Bottega's Director of Operations stated] “Bottega ... business operations completely ceased on these dates in October 2017 as a direct result of the smoke, soot and/or ash damage to the Insured Property from the North Bay Fires.” [citation] He continues: “The restaurants could not operate in their then condition as they were inundated with smoke soot, ash, and char. The restaurants similarly could not serve customers in their then condition.” [citation][8]
Two relevant insights arise. First, businesses outside the burn area can still recover losses for interruptions due to road closures and other civil authority impediments. Second, additional coverage can be obtained if smoke, ash, or similar particulates caused direct damage or led to an interruption of business operations.
COVID Cases Provide Additional Guidance
In the wake of the COVID-19 pandemic, businesses across the country sought insurance coverage for closures. Some of those cases provide additional analysis that support coverage for businesses suffering “secondary” impact from the fires. In N. State Deli, LLC v. Cincinnati Ins. Co.,[9] the North Carolina Supreme Court sided with the policyholders in concluding that “direct physical loss” could reasonably be interpreted as encompassing business closures due to government mandates related to the virus. The insurer argued that “loss” mean permanent deprivation to distinguish it from “loss of use.”
The court disagreed, concluding that physical loss of property could be established by any persistent issue (such as cat urine odor) rendering it “temporarily or permanently unusable or uninhabitable.”[10] The court’s rationale suggests that, even in the absence of a “Civil Authority” provision, a policyholder would be able to recover for such interruptions under North Carolina law.
This overlap between property “use” and “loss” follows from a contextual and common-sense expectation that insurance should protect from threats to property that make it unusable for the purpose for which it is insured. Property “loss” surely occurs when it is no longer usable for its insured purpose, as a policyholder would reasonably expect. Thus when the restaurants lost physical use of their properties as restaurants due to the pandemic orders, they experienced a direct physical loss.[11]
Unfortunately, the California Supreme Court in Another Planet Ent., LLC v. Vigilant Ins. Co.[12] addressing a COVID case determined that “direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property.”[13] But it recognized that its ruling was limited to present facts, stating “we cannot and do not in this proceeding determine that the COVID-19 virus can never cause direct physical loss or damage to property.”[14]
Critically, the court acknowledged in dicta that a “direct physical loss” could be implicated by a “noxious substance or odor” that inhabits a property for an extended period.[15] Persistent odor of smoke affecting businesses near the fires would appear to fall within this exception.
Conclusion
Businesses suffering direct burn damage from the fires should have a straightforward path to recovery for that loss of property. Both those primarily impacted as well as those in the surrounding area should also seek coverage for any lost revenue. Insurers will almost certainly push back on those that did not suffer direct fire damage, but policyholders are entitled to the full benefit of the “Business Income” provision. Coverage counsel can fight back and explain that lost revenue can result from a variety of factors, even when the business was not directly touched by the flames.
*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1] Unfortunately, the California FAIR Plan that many affected businesses were operating under does not include any analogous provision. Business interruption coverage would have to come from a supplementary policy.
[2] ISO BOP Form BP 00 03 07 13.
[3] ISO BOP Form BP 00 03 07 13.
[4] Bottega, LLC v. Nat'l Sur. Corp.-Chicago, IL, No. 21-CV-03614-JSC, 2025 WL 71989 (N.D. Cal. Jan. 10, 2025).
[5] Id. at *2.
[6] Id.
[7] Id. at *3.
[8] Id. at *5.
[9] N. State Deli, LLC v. Cincinnati Ins. Co., 908 S.E.2d 802 (N.C. 2024).
[10] Id. at 810.
[11] Id.
[12] Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106 (2024).
[13] Id. at 1117.
[14] Id. at 1118.
[15] Id. at 1139–40.