Coverage for Business Interruption Loss from L.A. Wildfire Smoke Damage

Cort T. Malone , Marshall Gilinsky , Abigail Damsky

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January 22, 2025

Los Angeles Wildfire Insurance Coverage

Ongoing wildfires around Los Angeles have caused absolute devastation and damage across southern California. Thousands of people have lost their homes or been displaced, and businesses have suffered property damage and income loss caused by area closures and secondary damage effects of the fires. Many establishments, from local restaurants to the Los Angeles Rams NFL team, have been displaced due to the effects of the wildfires, and Billboard is keeping a running list of canceled music events throughout the area.

Even if they have not incurred fire damage, businesses affected by the wildfires are entitled to coverage under their insurance policies for business income loss stemming from smoke damage. However, insurance companies may argue that smoke-related damage is not covered, citing COVID-19 case law holding that the virus did not constitute physical damage to property. Nevertheless, policyholders should keep in mind that smoke damage is, and has always been, covered under insurance policies.

Just last week, a California federal court held that closures prompted by smoke damage from wildfires caused physical damage under an insurance policy. In Bottega LLC v. National Surety Corporation, the policyholder restaurant and adjacent café sought coverage for income losses stemming from the North Bay fires of October 2017, which prompted a state of emergency and a wide array of road closures. The fires did not reach the policyholder’s businesses, but “they were inundated with smoke soot, ash and char.” The court found that smoke damage is a covered loss, citing precedent holding that contamination “that seriously impairs or destroys [a property’s] function may qualify as direct physical loss.” 

To avoid liability, the insurance company in Bottega cited COVID cases, but the court found this unpersuasive and distinguished such cases from smoke-induced closures, finding that “whereas a virus is more like dust and debris that can be removed through cleaning, smoke is more like asbestos and gases that physically alter property.” 

The decision denied the parties’ cross-motions for summary judgment because there was an issue of fact as to whether the restaurant closed due to the physical damage from the smoke or the governmental order restricting access to the property. The court’s analysis and finding that the smoke, soot and ash physically impacted the restaurant confirms what has been known and understood for decades: Smoke damage is covered under insurance policies.

There is a long judicial history that the presence of smoke, noxious gases and odors constitutes property damage and should be covered. In the 1968 case West Fire Insurance Company v. First Presbyterian Church, a policyholder brought an action against its insurance company for damages due to loss of use of a church caused by gasoline vapors and presence in the soil. The Supreme Court of Colorado held that there is a direct physical loss when a building becomes uninhabitable. To hold otherwise would be to accept an interpretation that a “building which has been overturned or which has been placed in such a position as to overhang a steep cliff has not been ‘damaged’ so long as its paint remains intact, and its walls still adhere to one another.” This holding confirms that when a business is uninhabitable, whether from noxious gases or wildfire smoke, there is a covered loss. 

This reasoning has continued to be recognized and reiterated. For example, in 2016, wildfire smoke infiltrated a theater in Oregon, rendering it unusable for its intended purpose. Despite insurance company arguments that the smoke did not actually damage the theater, the court in Oregon Shakespeare Festival Association v. Great American Insurance Co. found that the claim was covered under a standard commercial property insurance policy “due to health concerns from the poor air quality caused by the wildfire smoke.” Other courts throughout the country have recognized that non-structural property damage sustained from smoke or gas is covered by insurance.

Following the COVID-19 pandemic, many courts accepted the insurance industry’s argument that the virus did not constitute property damage under their existing policy terms. A recent decision by the North Carolina Supreme Court found that “a reasonable policyholder in the restaurants’ shoes could expect ‘direct physical loss’ to property, as used in this policy, to include the results of COVID-19-era government orders, which affected the restaurants’ use of and access to their physical property, and because the policy otherwise contains no exclusion for viruses, we construe the ambiguity here in favor of coverage.”

Regardless of any insurance company’s efforts to apply COVID-related case law to losses suffered in the L.A. wildfires, smoke-related damage was covered before COVID and is still covered today. Policyholders need to be aware of the established law in this area in favor of coverage and be prepared to collect any relevant documentation to support claims to be filed in the days and weeks to come. 

Cort T. Malone is a shareholder in Anderson Kill's New York office who focuses his practice on insurance coverage litigation and dispute resolution, with an emphasis on commercial general liability, cyber, employment practices liability, advertising injury, directors and officers, and property insurance issues.
Marshall Gilinsky is a shareholder in Anderson Kill’s Boston office and represents policyholders in claims involving property and business interruption, commercial general liability, errors and omissions, directors and officers, and life insurance.
Abigail Damsky, an associate pending admission in Anderson Kill’s New York office, represents policyholders in insurance coverage disputes.