Firing On All Cylinders

by Locke Lord LLP
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The wildfires raging in Northern California are already the worst in the state’s history.  The risk of cataclysmic fires is greater in Southern California, but the elements (fierce winds, high temperatures, and low humidity) conspired  to create this conflagration.

Containment figures are finally increasing for these massive wildfires that continue to decimate California’s wine country.  To date, no cause(s) of the fires has been determined.  CAL FIRE estimates that 5,700 structures have been destroyed and more than 200,000 acres have burned.

This far exceeds the 2,900 structures destroyed in the 1991 Oakland Hills fires and the 2,820 structures destroyed in the 2003 Cedar fire, which were the most destructive fires in California history until last week.  Needless to say, the magnitude of these fires and the amount of destruction, disruption, and fatalities is beyond the pale.

According to a report released October 16th by Moody’s, “the tragic loss of lives and substantial property damage will cause billions of dollars of insured losses.”  “These fires will be among the costliest wildfires on record for US P&C insurers, which were already hit by high third-quarter catastrophe losses from Hurricanes Harvey, Irma and Maria and the Mexico earthquakes.”

In addition to the typical claims that insurers anticipate when wildfires roll through the state (e.g., property damage, business interruption, automobile claims, relocation expenses, etc.), here there will be significant claims relating to the wine industry and its supporting infrastructure.

For the vineyards in the region that are not burned by the fires, there is still the risk that the grapes and vines will be harmed by the heat and smoke.  There are upwards of $3 billion grapes still on the vines yet to be harvested, and insureds have already started to file claims, according to Larry Chasin, CEO of Pak Programs, which specializes in custom insurance programs for wineries and vineyards.

For the vineyards that are burned and need to be replanted, it will take most of them at least three years or more to get fully operational, since at least three years is required for the vines to mature and produce viable fruit.  In addition to the actual vineyard vines, there is all of the building infrastructure supporting each facility, including barns, processing facilities, and storage areas where vast amounts of wine are aged for years before being bottled and finally sold.  All of the critical farming and irrigation equipment will need to be replaced.

Unlike most agriculture communities, California’s wine country is buttressed by a thriving tourist industry, which will also be negatively impacted.  According to Chasin, insurers are already seeing a business interruption exposure “for tasting rooms that can’t open, due to lack of power, and you may have some interruption to production too.”

In addition to the insured claims coming from the voluntary market, P&C insurers should also expect to receive claims from the California FAIR Plan program, which requires California insurers to participate in the losses of high risk properties that are unable to obtain insurance in the voluntary insurance market

On Thursday, October 12th, catastrophe modeler RMS estimated losses to range from $3 to $6 billion and, based on satellite-derived fire perimeters, calculated the total exposure to be up to $14 billion.  RMS noted that due to the “high penetration rate of wildfire coverage in standard residential and non-residential policies, this range also represents an estimate of insured losses.”  RMS noted that a higher total loss remains possible given the potential for long-term business interruption.

To put the significance of this event in context, the 2015 Valley Fire (which occurred in the less populated Lake County, north of Napa and Sonoma Counties) destroyed over 1,900 structures and 76,000 acres, resulting in approximately $900 million in insured loss, according to Property Claim Services (PCS).  Another recent natural disaster to hit the region, 2014’s 6.0 earthquake, caused at least $500 million in damage.

This had not been a good year for P&C carriers. Just finding the ‘man-power’ for adjusters, electricians, carpenters, telecommunication experts and engineers to remediate the losses in Texas, Florida, and Puerto Rico will take a herculean effort by insurers, and this is often when the industry shines, as it too must fire on all cylinders.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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