That’s true, even if the fire is far away
[A] court in Oregon ordered an insurer to provide income coverage to an acting company that had
to cancel performances because wildfire smoke had infested its theatre and was deemed hazardous to audience members.
By Joseph S. Harrington, CPCU
When insurers talk about spread of risk, they usually don’t mean damage extending across half a continent. Yet that’s what carriers had to contemplate in the spring and summer of 2023, as smoke from a series of wildfires in Canada spread across eastern North America. At one point, New York City recorded the worst air quality of any city in the world, despite being thousands of miles from the blazes.
The 2023 Canadian wildfires dramatized what property insurers had been experiencing for a decade or more: increasing levels of exposure to wildfire smoke that spreads far, far beyond the flames.
To cite one example of the potential insurance fallout, the Colorado Division of Insurance hosted a contentious “town hall” meeting in January 2022 for homeowners affected by the December 2021 Marshall Fire near Boulder. Attendees demanded, among other things, that insurers bear the cost of specialized testing for toxins in wildfire smoke residue. Multiply that by thousands of communities and millions of homes, and you get an idea of how open-ended the exposure could become.
A standard peril
Smoke is a covered cause of loss in virtually every residential and commercial property policy. The only restrictions on coverage in standard ISO policies is that the damage must be sudden and accidental, and that it cannot be caused by agricultural smudging or industrial operations.
Smoke damage has long been regarded as falling within the purview of “all direct loss of fire” insured by the 1943 Standard Fire Policy, a foundation element of modern commercial property policies. The original drafters were, no doubt, concerned primarily with smoke created by a local fire at or near an insured location. Wildfires tended to occur away from insured properties.
Things have changed in recent decades with residential and commercial development in the wildland-urban interface—locations on the perimeter of metro areas where human habitation integrates with the natural environment. Not only are more structures at risk of wildfire, the resulting combination of natural and manmade fuels produces more injurious smoke than vegetation alone.
Mitigation challenges
When it comes to preventing or mitigating structural damage from wildfires, things are pretty straightforward. Keep surroundings clear of vegetation and debris, and avoid features, such as wooden shingles, that can be ignited by flying embers.
Dealing with wildfire smoke damage is a different matter entirely, as insured property owners are advised at times to act in ways that contradict their typical obligations under an insurance policy.
For example, even if an insured structure remains intact after a wildfire, its owners may be advised to stay away until air quality testing has determined that it is safe to return. They will often be advised not to search for belongings or clean the premises for fear of stirring up toxins left by the smoke.
In short, insureds may be encouraged to avoid steps that would limit damage to buildings and personal property and reduce the length of time needed to reoccupy the premises.
Is there damage?
The prospect of open-ended exposure to wildfire smoke forces insurers to re-evaluate their exposure to smoke damage.
Since smoke has long been considered a covered peril under “fire” policies, it will likely be prohibitively difficult to restrict coverage for smoke loss, especially for admitted carriers who would almost certainly have to file a rate reduction to reflect a reduction in coverage.
An alternative approach would be to seek to restrict what’s considered “damage” for purposes of coverage.
For example, some insurers have established a distinction between physical damage that prevents property from functioning as intended and “cosmetic” damage that merely affects its appearance. Excluding coverage for purely cosmetic damage allows carriers to reduce the cost of coverage in regions prone to windstorm catastrophes.
Then, during the COVID-19 pandemic, insurers were largely spared the cost of compensating commercial accounts for revenue lost due to lockdowns ordered by public authorities. Even in the absence of communicable disease exclusions, courts reasoned that the mere presence of the virus did not constitute physical damage required to trigger business income coverage.
Worst of both worlds?
So far, however, prospects are not auspicious for limiting wildfire losses by restricting what’s considered to be insurable damage.
In a case directly addressing the issue, a U.S. district court in Oregon ordered an insurer to provide income coverage to an acting company that had to cancel performances because wildfire smoke had infested its theatre and was deemed hazardous to audience members. The insurer had argued that there should be no coverage because there had been no physical damage to the theatre or contingent property.[1]
Wildfire smoke, then, may present the worst of both worlds for insurers in that the mere presence of smoke contamination is regarded as damage by a covered peril. The fact that smoke produced by fires in the wildland-urban interface is hazardous to human health compounds the problem by prolonging the rehabilitation of smoke-damaged locations and the return of occupants.
It’s little wonder, then, that leading carriers would retrench from states plagued by wildfires. For producers who find themselves increasingly turning to E&S markets for property policies, you may want to check their provisions affecting coverage for smoke damage.
[1] Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247 (D. Or., 2016)
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
