Insurers Face Heightened Scrutiny for California Fire Claims

California regulators and the U.S. Department of Justice intensified scrutiny of the insurance industry over its conduct surrounding the 2025 LA wildfires. According to the California Department of Insurance, State Farm received nearly 11,300 residential claims but failed to comply with state claims-handling requirements in many cases. Investigators reviewed 220 claims and allegedly uncovered 398 violations in 114 of them, including delays in opening investigations, late claim determinations, underpayment of benefits, and failures to issue written denials for smoke damage claims. Regulators also accused the insurer of making unreasonably low settlement offers and burdening policyholders with unnecessary delays during a period of crisis.

At the same time, the U.S. Department of Justice entered a separate California court battle involving allegations that major insurers coordinated to reduce homeowners’ fire insurance coverage before the 2025 wildfires. The lawsuit, filed by 60 homeowners against 16 insurance companies, claims insurers engaged in anticompetitive conduct by canceling policies, refusing renewals, and avoiding competition for displaced customers, forcing homeowners into California’s state-run FAIR Plan with less comprehensive coverage and higher rebuilding costs. Insurers argued their actions were protected because they were connected to efforts to persuade regulators to approve higher rates. However, the DOJ argued that the alleged coordinated boycott activities were distinct from protected lobbying efforts and therefore not immune from antitrust claims. According to the Justice Department, allegations that insurers coordinated through meetings, public statements, and industry events could support claims of illegal collusion. The DOJ emphasized it was not taking a position on the truth of the allegations but argued the homeowners’ claims should proceed.

In a previous blog available at https://lnkd.in/gEpgyaZx, I explained how many insurers were wrongfully denying claims in the aftermath of the California fires. From analyzing relevant case law, two insights arose. 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. These conclusions are supported by the California Supreme Court’s analysis of COVID claims in Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106, 1139–40 (2024). There, 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. Persistent odor of smoke affecting businesses near the fires would appear to fall within this exception.