Los Angeles wildfires: Implications for casualty insurers

Burning over 50,000 acres, 20,000 structures, and causing 30 fatalities, insured loss estimates for the devastating Los Angeles wildfires in January 2025 currently stand at around US$30 billion.

When longer-term latent damages are included, overall economic losses could reach over US$250 billion. Who will pay for these billions of losses?

Overall economic costs are likely to be shared amongst 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 mitigation and adaptation measures going forward to minimize future exposure to wildfire risk.

Figure 1: Location of the Palisades and Eaton Fires. Image sources: CALFIRE, OpenStreetMap

Primary insurers will initially pay out on losses attributed mostly to property damage, content loss, business interruption, and additional living expenses, though a significant proportion of homes are either uninsured or underinsured. Increasingly, property insurers are not offering coverage in high-risk areas, with homeowners defaulting back to the state-sponsored California Fair Access to Insurance (FAIR) Plan, which does not always provide the comprehensive coverage they require.

Figure 2: Burn footprints of the Palisades and Eaton fires. Image sources: NASA Earth Observatory

While property insurers are addressing the direct losses, casualty insurers may be exposed to liabilities through numerous potential triggers. These range from direct allegations of ignition sources for utilities to failures in emergency response by municipal departments. Latent exposures, e.g., due to health concerns, also present significant litigation risks.

Ignition

If liability for starting the fires or failure to mitigate the damages can be assigned to commercial actors, property insurers and municipal governments may seek subrogation (i.e., recoup costs) for expenses associated with emergency response and destroyed structures.

California is unique in the U.S. in allowing utility companies to be held liable if their equipment is proven to have provided the ignition source for a wildfire, regardless of negligence. This interpretation of the legal doctrine of inverse condemnation effectively imposes a strict liability-like standard, evident when PG&E faced massive liabilities following the 2018 Camp wildfires, leading to bankruptcy. 

In response to these large losses and the semi-public nature of a large utility like PG&E, the state legislature established the California Wildfire Fund in 2019 to help prevent bankruptcy for investor-owned utilities (IOUs) hit with future wildfire liability claims.

Although an IOU can claim from the fund to cover the cost of claims against it, it may also have to reimburse the fund should the California Public Utilities Commission find that the utility acted imprudently concerning the rights and safety of others.

Several lawsuits have already been filed against Southern California (SoCal) Edison, alleging that the Eaton Fire started from a spark from their transmission lines that were not properly maintained, and that they should have shut off power earlier in the area, given the severe fire weather warnings.

As a member of the California Wildfire Fund, SoCal Edison may be able to recoup some losses from this fund, provided it can counter the allegations regarding a lack of “prudent mitigation.”

Another recent lawsuit alleges that a second ignition source, hours into the Palisades Fire, came from two downed powerlines owned by the Los Angeles Department of Water & Power (LADWP). The LADWP is not a fund member and would be solely liable for any successful lawsuits regarding ignition.   

Operational failures

As potential liability extends beyond ignition sources, casualty insurers may also face claims against professionals or businesses for alleged negligence or inadequate risk mitigation.

The LADWP faces further legal action for failure to provide timely repairs to the nearby Santa Ynez reservoir. A minor maintenance issue in February 2024 left Pacific Palisades with only 2.5% of its total water storage capacity available to fight the Palisades Fire, leading to a drop in water pressure in the hydrants, which ran dry at the height of the fires. 

The liability landscape is further complicated by other pre-existing issues and emerging allegations, including:

• A lawsuit against the LA firefighting department for unfair pay and understaffing.
• Scrutiny over late evacuation orders in west Altadena, where most fatalities occurred.

The long tail

Other liabilities can be more latent and emerge over time, such as losses incurred for the required wildfire cleanup and rebuilding, and delayed health impacts. For casualty insurers, these costs are more challenging to assess and reserve for, as responsibility is often contested and determined by legal fights around who should pay.

1. Health impact

The latent impacts on human health from wildfires could become the subject of future litigation due to impacts from smoke inhalation, toxic waste exposure during cleanup, and/or associated air and water pollution that lingers in the surrounding areas.

Lawsuits could be filed against municipal government departments tasked with protecting air and water quality, and potentially, firefighting chemical manufacturers if toxins had been misrepresented, e.g., as to their heavy metal content.   

Wildfires emit copious amounts of PM2.5 (particles smaller than 2.5 micrometers), 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 without 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 employees could potentially be held liable for long-term health consequences.

Figure 3: Smoke footprints for Los Angeles wildfires simulated by Moody’s RMS North American Wildfire Model. Image source: Moody's RMS Event Response

2. Environmental contamination and cleanup

• Toxic waste disposal:  Burnt structures themselves are also sources of toxic chemicals (from the former contents as well as firefighting chemicals), requiring remediation before any further construction on these sites. Principally handled by federal government agencies such as the Environmental Protection Agency (EPA) and the Army Corps of Engineers (ACE), and supervised by the Los Angeles County government, assigned private contractors could be sued if they fail to properly dispose of toxic waste.
• Water quality: Carcinogens in firefighting chemicals (e.g., Phos-Chek) and runoff from burnt areas can contaminate wells and other drinking water sources. Inadequate remediation by the municipal water authorities could result in additional litigation.

A more detailed breakdown of the potentially implicated sectors, casualty lines, and their assessed relevance in the LA context can be found in the "Los Angeles Wildfires: Implications for Casualty Insurers" document here.