In depth: Los Angeles wildfire - Implications for casualty insurers

In January 2025, 12 uncontrolled wildfires in the Los Angeles (LA) vicinity burned over 50,000 acres and 20,000 structures, leading to the evacuation of 200,000 people from their homes and causing 30 fatalities.

The two largest fires, the Palisades and Eaton fires, took more than three weeks to fully contain and were among the costliest wildfires in California history, given their footprint in urban areas with high-valued real estate. Some estimates place these fires as the costliest natural disaster in US history, ahead of Hurricane Katrina in 2005.  

Insured losses from the recent LA wildfires are currently estimated at around US$30 billion, while overall economic losses could reach more than US$250 billion when including longer-term latent damages. Insured losses are mostly attributed to property damage, content loss, business interruption, and additional living expenses, and hence fall on property insurers to pay out where coverage exists.  

Figure 1: Burn area for the Palisades and Eaton wildfires

Other types of liabilities from the fires can be latent in nature and emerge over time, e.g., losses related to the required cleanup and rebuilding or delayed health impacts.  These types of liabilities relevant for casualty insurers can be more challenging to assess and are the focus of this discussion. 

The likelihood of disastrous wildfires is increasing in hot and dry regions with substantial vegetation, like California, in part due to ongoing warming and drying trends, but also because of land mismanagement and unchecked development in the wildland-urban interface (WUI) in the western areas of the US.  

The last half century has seen significant positive trends in the amount of burned area, the length of the fire season, and economic damages from wildfires in the US as a whole. While wildfires have typically been more common in the western US, large wildfires have also been emerging recently in eastern states like New Jersey and Minnesota, where they are more unprecedented.

Figure 2: Wildfire Extent in the US, 1983 - 2022. Source: US Environmental Protection Agency

As disastrous wildfires become more frequent, debates and legal fights grow regarding responsibility for paying for cleanup and future risk mitigation. In the case of the recent LA wildfires, overall economic costs will likely be shared among homeowners, the property and casualty insurance industry, multiple levels of government (city, state and federal), public utilities, the health sector and the general public – not only for cleaning up and rebuilding but also for investing in physical risk mitigation and adaptation measures going forward.

Wildfires of this magnitude in urban areas lead to damages at multiple timescales: 1) immediate damages associated with loss of life, structures (residential and commercial), public infrastructure (e.g. parks, water treatment plants, schools) and economic activity, as well as acute health impacts from smoke inhalation, 2) intermediate damages associated with population displacement and post-disaster clean-up and 3) longer-term health impacts associated with exposure to toxins in both the initial impact and clean-up phases.

In the case of the January 2025 LA wildfires, primary insurers will initially pay to rebuild most of the lost structures, though a significant proportion of homes were either uninsured (in some cases with policies dropped in the last year, or underinsured), particularly if they were covered by the state-sponsored California Fair Access to Insurance (FAIR) plan, a stopgap insurance coverage for homeowners with no other options.

The FAIR plan coverage has grown exponentially in recent years (US$50 billion in exposure in 2018 compared to US$458 billion in September 2024). This is due to primary insurers pulling out of high wildfire-risk areas in California, with homeowners forced to switch to the FAIR Plan. Due to a current shortfall in funds to pay out claims from the recent LA wildfires, the FAIR Plan has requested that the state insurance commissioner charge a US$1 billion assessment on primary property insurers in the state to help recoup some of these costs, which will likely be passed on, at least in part, to ratepayers as temporary supplemental fees.

Figure 3: Location of Palisades and Eaton Fires. Source: CALFIRE, OpenStreetMaps

Property insurers and municipal governments that incurred heavy costs associated with the emergency response and subsequent clean-up may also be able to subrogate some of their claims (i.e., recoup costs) if liability for starting the fires or failure to mitigate the damages can be assigned to commercial actors.

California is unique in the US in allowing utility companies to be sued if their equipment is proven to have provided the ignition source for a wildfire, regardless of negligence. This strict liability standard, inverse condemnation, was originally intended for governments to spread costs more widely through taxation rather than individual property owners damaged by government actions.

In the case of investor-owned utilities (IOUs) that cannot pass on costs directly to ratepayers, this legal precedent allowing IOUs to be sued for wildfire ignitions may not be economically efficient in promoting risk-reducing behaviors on the part of either utilities or property owners.

Regardless, in the current legal environment, the specific weather conditions that led to high wildfire risk in January 2025 in the LA region were well forecast days ahead of the fires. A nine-month extended drought following two wet winters with substantial vegetation growth, along with hurricane-speed Santa Ana winds, led to multiple red flag warnings in the days leading up to the fires.

The prior warnings of extremely hazardous conditions in this case could add to arguments that the fires were avoidable and that the parties responsible for igniting the Eaton and Palisades fires should be held liable for a large part of the ensuing damages.

Several lawsuits have already been filed alleging that the Eaton Fire started because Southern California (SoCal) Edison didn’t properly maintain the transmission lines that may have provided the initial spark and failed to shut off power early enough in the nearby neighborhoods. No specific source for the initial ignition of the Palisades fire has yet been confirmed, although current hypotheses place a possible source as a reignition from an earlier fire along a hiking trail, potentially from human activity.

A recent lawsuit also alleges that a second ignition source, hours into the Palisades Fire, came from two downed power lines owned by the Los Angeles Department of Water & Power (LADWP).

After electrical equipment from Pacific Gas & Electric (PG&E), an IOU, was found to have sparked the 2018 Camp Fire in northern California, resulting in 85 fatalities, the subsequent lawsuits and strict liability standards in California pushed PG&E into bankruptcy.

In response to these large losses and the semi-public nature of a large utility like PG&E, the state legislature established a state-level California Wildfire Fund in 2019 to help prevent bankruptcy for IOUs hit with wildfire liability claims.  With the establishment of this fund, plaintiffs are now required to prove negligence on the part of covered utilities to establish liability. 

SoCal Edison is now one of the three IOUs that currently pay into this fund; hence, if their equipment is proven to have started the Eaton Fire, they might be able to recoup at least some of any losses they might face if they can prove that they practiced 'prudent mitigation' ahead of time. Conversely, the LADWP is not a member of this fund and would therefore be solely liable for any settlements regarding their liability for ignition in the Palisades Fire.

There is a second set of lawsuits that have already been filed focusing on alleged mismanagement and negligence in the firefighting response to the Palisades fire. The primary lawsuits allege that the LADWP failed to provide timely repairs to the nearby Santa Ynez reservoir, which went down for a minor maintenance issue in February 2024, “... thereby leaving Pacific Palisades with only 3-million gallons of total water storage in three separate water storage tanks …. and only 2.5% of its total water storage capacity available to fight the Palisades Fire.” These lawsuits allege that this shortfall led to a drop in water pressure in the hydrants, which ran dry at the height of the fires.

Given the high winds at the start of the fires which made it difficult to use planes to drop water and fire retardant on the fastest-burning areas before they became an urban conflagration, firefighting professionals have stated publicly that no additional amount of resources could have fought these gigantic and fast-moving fires in a way that would have prevented most of the damage. The strength of these allegations will thus be decided in court. 

Other litigation associated with the emergency response focuses on the possible impacts of recent budget cuts to the LA firefighting department, with a pre-existing lawsuit from 2023 alleging unfair pay and understaffing getting renewed attention. Other allegations could find their way into court, e.g., that residents in west Altadena, where most fatalities took place, were given late evacuation orders only after fires had already reached their neighborhood.

Given the high financial costs of reconstruction and the problem of under-insurance in fire-prone areas of California, property insurers are increasingly being sued following the LA wildfires. One type of lawsuit alleges that insurers are unable or unwilling to adequately pay out on homeowner policies for reconstruction, e.g., homes covered by a layer of toxic ash but otherwise undamaged. 

More recent lawsuits in May and June 2025 allege that property insurance companies in California colluded to restrict coverage in certain areas, e.g., Pacific Palisades, and force homeowners onto the FAIR plan with reduced coverage. Similarly, property insurers are also alleged to have deliberately under-assessed properties, such that the payouts for destroyed structures are currently insufficient to allow for rebuilding to the previous standard.

Going forward, the latent impacts on human health from the wildfires could also become the subject of future litigation. These impacts could be due to smoke inhalation, exposure to toxic waste during the cleanup, and/or associated air and water pollution that lingers in the surrounding areas. Any of these damages could trigger lawsuits against municipal government departments tasked with protecting air and water quality, and potentially product manufacturers, e.g., for toxins in firefighting chemicals that may have been misrepresented as to their heavy metal content ahead of time.

In terms of health impacts, there are both short- and long-term damages associated with smoke inhalation. Wildfires are known to emit copious amounts of PM2.5 (particles smaller than 2.5 micrometres) and, for urban conflagrations in particular, numerous toxic byproducts of burning building materials and home furnishings, including lead, other heavy metals, and volatile organic compounds (VOCs).

Poor air quality also affects not just firefighters and homeowners in the burnt areas, but also large populations living and working downwind of the affected areas. For instance, those who work outdoors or in indoor spaces that lack air filters may be disproportionately affected. Employers, including fire departments and construction companies, that fail to provide sufficient Personal Protective Equipment (PPE) or safe working conditions for their employees could potentially be held liable for long-term health consequences. 

Figure 4: Smoke footprints simulated by Moody’s RMS North American Wildfire Model: Source - Moody's RMS Event Response

The burnt structures themselves are also sources of toxic chemicals (from the former contents as well as firefighting chemicals) that need to be appropriately remediated before any further construction on these sites. The remediation and debris removal in this case is principally being handled by federal government agencies such as the Environmental Protection Agency (EPA) and the Army Corps of Engineers (ACE), supervised by the Los Angeles County government, although they also work with private contractors who could be sued if they failed to dispose of toxic waste properly.

Finally, the water quality in surrounding areas could be affected, due to carcinogens in firefighting chemicals (e.g., the fire-retardant Phos-Chek) and runoff from burned areas entering wells and other drinking water sources. Inadequate remediation by the municipal water authorities could result in additional litigation.

Table 1: Potential Litigation Triggers Associated with the Los Angeles (and other urban) Wildfires: Based in part on litigation filed thus far, investigative reporting of damages, and theoretical coverage trigger pathways for urban wildfires laid out in the Global Exposure Accumulation Clash (GEAC) wildfire scenarios.

After the recent LA wildfires are litigated, cleaned up, and paid for, the question remains of how to prevent and mitigate future damages from costly wildfires in high-risk areas in California and other parts of the US, where they are becoming an increasing concern due to climate trends.  

Risk mitigating practices for wildfires include hardening properties to reduce flammability, widening roads to reduce the rate of fire spread, changing zoning laws to appropriately price and/or disincentivize development in the WUI, burying electrical equipment and even redesigning water infrastructure to build the capacity to fight urban conflagrations, rather than just single building fires. 

These wide-ranging and costly endeavors should likely be included in a comprehensive strategy that promotes risk-reducing behavior from multiple relevant actors, e.g., through the California Climate Adaptation Strategy, last updated in 2024, and the associated Planning Grants.

Wildfire risk mitigation is also relevant to the property and casualty insurance industry when thinking about how to price products and maintain coverage availability for homeowners, business owners, utility companies, and municipal governments that suffer damage and carry potential liability.  Property insurers can help to incentivize risk-reducing behavior, e.g., by offering lower rates for homes built to stricter standards of fire-resistant materials and appropriate landscaping intended to prevent wildfire spread, e.g., with the Firewise program, and offering lower rates in safer, less risk-prone areas away from the WUI.

On the casualty side, the costliest liability has been, thus far, for utility companies accused of providing the ignition sources for the fires, due to California’s strict liability standards for wildfire ignitions, as mentioned previously.  While electricity transmission is inherently fire-prone, burying power transmission lines in wildfire-prone areas and clearing brush near unburied lines can both help to mitigate this risk.

Given the sheer number of transmission lines across the states, this is a vastly expensive proposition. PG&E pledged to bury an additional 10% of its lines in high-risk areas after emerging from bankruptcy in 2020, and this work alone will cost tens of billions of dollars. Other risk-mitigating behaviors, such as appropriately timing power shutoffs during wildfire-prone weather, could also benefit from better software, data collection, and analysis to provide real-time location-specific alerts. Casualty insurers could potentially help to incentivize all these risk-reducing measures for power utility companies through appropriate policy mechanisms. 

While insurance is the business of risk management, natural disasters of this magnitude are still extremely costly for the property and casualty insurance industry, multiple levels of government, and the public at large. The proper allocation of responsibility for paying clean-up and risk mitigation costs will continue to be addressed in the courts and at all levels of government as society grapples with a heightened risk of weather-based natural disasters and human development in hazard-prone areas.

Property and casualty insurers can play a role in funding reconstruction and promoting risk-mitigating behavior, as can governments through forward-looking legislation and financial assistance designed to help address the evolving risks of catastrophic natural disasters and their impacts on society going forward. 

Lessons learned from the recent LA wildfires will hopefully lead to improvements in urban wildfire prevention and emergency response, which could reduce overall damages from similar disasters in the future.