As of the date of the publication of this blog entry, the wildfires that have been
ravaging Northern California since October 8, 2017 have been somewhat contained. However, the slightest change in weather
conditions could frustrate the efforts of firefighters and first responders and
cause even more devastation to the region. The investigation into the cause(s) of the fires
is still ongoing. Early reports
indicated that faulty equipment of California utility PG&E may have ignited the fire, but at least one person has
since been arrested on suspicions of arson.
In July of this year, this blog already described
the increased risk for wildfires in vast parts of the western United States,
especially California, and Canada and predicted a “surge in wildfire-related
insurance claims.” The authors noted
that “preexisting dry conditions and record-setting heat events created the
perfect conditions for wildfires across portions of the American Southwest,
southern Great Basin, and southern California.”
Moreover, the authors discussed challenges first-party property insurers
and their insureds may face in adjusting wildfire-related claims. Issues as to the “physical loss or damage”
trigger are likely to arise where the insured property is not damaged or
destroyed by flames, but suffers smoke, dust and/or soot damage. Specifically—and depending on the policy
language—to the extent that the “physical loss or damage” requirement is not
met, coverage for business income losses may also be unavailable.
Without doubt, the most recent wildfires will stir up
similar issues for first-party property insurance carriers. After all, California’s Sonoma and Napa
counties, where three of the largest fires have been burning, are home to the most lucrative
wine-producing region in the United States, and the fourth largest in the world. According to the Wine Institute, the California wine industry generates $114 billion in annual economic activity and draws millions of
tourists to the region. To date, over
7,000 structures are believed to have burnt to the ground, several of them
belonging to wineries. The financial ramifications of the wildfires
to the region can only be imagined; losses are currently estimated to reach up to $6 billion.
Aside from first-party property insurers, the news out of
Northern California should be of concern to those carriers offering event
cancellation coverage, as venues sustained damage and events have been cancelled
or postponed. Ranging from local
culinary festivals in California’s wine country to larger sporting events, like
the Virgin Sports Half Marathon in San Francisco or the Tough Mudder NorCal, the list of cancellations and postponements goes on.
But, this necessarily raises the question as to what circumstances warrant
the cancellation or postponement of a scheduled event. In other words, does it, for example, suffice
that the air quality on the day of the event is going to be poor because of
smoke from the fires?
The case of Oregon Shakespeare Festival Ass'n v. Great Am. Ins. Co., No. 1:15-CV-01932-CL, 2016 WL 3267247 (D.
Or. June 7, 2016), vacated,
No. 1:15-CV-01932-CL, 2017 WL 1034203 (D. Or. Mar. 6, 2017) addressed some of these
issues. As already discussed on this blog in July,
in Oregon Shakespeare Festival Ass'n,
the insured sought coverage for business income losses that it incurred after
nearby wildfires caused smoke, ashes, and dust to infiltrate the theater,
coating the seating, HVAC, lighting, and electronic systems with dust, ashes,
and smoke. The plaintiff insured was forced to suspend operations and cancel
performances for several days to perform cleaning, replace air filters, and
allow the smoke in the air in the theater to dissipate. Notably, none of the insured’s structures was
directly impacted by flames. Although
the case was later vacated by joint stipulated request of the parties and applied
the laws of the State of Oregon, it offers some excellent insights as to the
legal issues and arguments that are likely to arise for event cancellation
insurers and their insureds from the California wildfires.
Direct Physical
Loss Or Damage
Because the insured’s structures—two fully enclosed stages
and one partially enclosed open-air stage—were not impacted by flames from the
fire, the insurance carrier in Oregon
Shakespeare Festival Ass'n argued that the smoke, soot, and ash damage to
the open-air venue did not constitute “direct physical loss or damage,” as
required by the policy. In addition to
arguing that the air in the theatre did not qualify as property, the insurer
argued that “physical” damage requires a structural change to the building
itself. In contrast, the insured
asserted that only the showing of “any injury or harm to a natural or material
thing” was required. Id.
at *5. The court sided with the
insured, finding that the insured sustained “physical loss of or damage to
property” when the wildfire smoke infiltrated the theater and rendered it
unusable for its intended purpose, and concluded that the policy covered the
insured’s business interruption losses.
The court in Oregon
Shakespeare Festival Ass'n relied heavily on dictionary definitions to
resolve the parties’ dispute, and also consulted case law from other
jurisdictions that have found that “physical loss or damage” does not
necessarily require a structural alteration.
Rather, the fact that the smoke, soot, and ash temporarily rendered the
insured’s venue unfit for operation was enough to trigger the policy.
Clearly, slightly different policy language may have led
to a completely different result, as holds true for the law that governs any
particular insurance contract.
Nevertheless, the Oregon
Shakespeare Festival Ass'n decision demonstrates how critical policy
language may be broadly construed in order to find coverage.
Is Smoke From
Wildfires “Pollution”?
The policy in Oregon
Shakespeare Festival Ass'n—similar to many event cancellation policies—excluded pollution from coverage. Specifically, the pertinent provision excluded loss or damage caused by “[s]moke, vapor or gas from agricultural smudging or industrial operations.” The carrier argued that the wildfire smoke was a “pollutant,” thus precluding the insured to recover under the policy.
Again, the court was not persuaded by the carrier’s
arguments. Sticking to its textual
approach, the court noted that while “pollutants” means “any solid, liquid,
gaseous or thermal irritant or contaminant, including smoke, vapor, soot,
fumes, acids, alkalis, chemicals and waste,” the policy here required the smoke
to come from agricultural smudging or industrial operations. Id. at *7.
Here, the smoke came from the wildfires, and, therefore, the smoke
exclusion did not apply. In reaching
this conclusion, the court offered the following advice to the insurer: “If the
policy drafters wanted to exclude smoke other than smoke ‘from agricultural
smudging or industrial operations,’ they could have done so.” Id.
Local Authority
In Oregon Shakespeare Festival Ass'n, the insured itself monitored
the conditions surrounding the wildfires and decided whether or not to cancel
an upcoming evening performance based on “(1) current weather conditions, (2)
the forecast for the remainder of the evening, and (3) the health status of the
actors.” Id. at *2. While the insured relied on the local Air
Quality Rating, cancelling a performance when the rating was “unhealthy or
hazardous,” the insured did not act upon any order of a local authority. Although this was ultimately not an issue for
the court, the decision sheds valuable insights in the difficulties an insured
may face when it comes to the data on which to base a decision to cancel or
postpone an event.[1]
A review of the list of cancelled or postponed events in
relation to the California wildfires shows that “poor air quality” and related
“public safety and health concerns” are frequently cited as the reason. In addition to these criteria, the evacuation and safety of staff may render it difficult for an event to go on as
planned. Thus, the determination of
coverage will often boil down to what the insureds and/or event organizers
perceived to be a “serious threat” or “unsuitable conditions” and whether such
assessment was reasonable.
Given the anticipated increase in event cancellation
insurance claims as a result of the California wildfires, we expect the courts will
shed more light on the issues raised above.
Posted by Isabella Stankowski-Booker and Jonathan MacBride
[1] In Oregon Shakespeare Festival Ass'n, the
insured also considered the following criteria before deciding whether to
cancel a specific performance:
1. Ashland
Air Quality / Particle Data (specifically the one hour average PM2.5 and
instantaneous reading taken during the show from the Ashland monitoring device
“R2D2”)
2.
Trending of the air quality data
3.
Forecast for evening—consultation with the Weather Service Office
4.
Visibility
5.
Current air quality conditions in and around the Elizabethan Theatre
6.
Conditions in Medford (only if Ashland data is unavailable or Medford
conditions are pertinent to the Ashland weather forecast)
7.
Is performance possible with alterations, e.g., slowing down stage combat, etc?
8.
Is performance possible with curtain time delay (latest start time 9:00 p.m.)?
Id. at *2.
Additionally, the insured relied on feedback from its cast members
regarding their physical ability to continue and its “smoke team” that stayed
throughout performances to assess conditions and institute last-minute
cancellation when conditions deteriorated.