Insurance for fire losses

During the last week, wildfires have devastated vast areas of California. While the fires have caused massive property loss, the exact toll in terms of property and business losses is not yet known.

Because it takes months or even years for burned-out areas to return to their normal state, the fires likely will have long-term economic consequences, including cancellation of various events, interference with travel, impacts on motion-picture and television productions, expenses of relocation and impacts on hotels, resorts and other businesses. Fortunately, many types of insurance may be available for the fire losses.

First-party insurance, such as property insurance and aspects of homeowner's and renter's insurance, protects for losses incurred by an insured. Fire insurance is a common form of first-party insurance.

Property insurance policies usually cover the structures that are listed and scheduled in the policy. However, policies often contain a provision insuring "newly acquired" property. This provision may insure newly acquired property even though it is not listed on a schedule of structures.

Most property insurance policies also insure personal property. An "unscheduled personal property" provision usually provides this coverage. This provision typically covers personal property that is "usual or incidental to the occupancy of the premises" or "used by an insured while on the described premises."

However, only "floater" policies or "floater" endorsements will cover certain types of property that are easily movable, such as furniture, jewelry, certain machinery and stock.

California has a standard-form fire insurance policy. See Cal. Ins. Code Section 2071. The form mandates that the insurer write coverage "to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture, nor in any event for more than the interest of the insured, against all loss by fire, lightning and by removal from premises endangered by perils insured against in this policy."

Many business property insurance policies cover economic losses, such as a drop in, or inability to conduct, business as a result of an insured peril. This insurance typically covers economic losses from an interruption of business, and may cover economic losses for an extended period of time -- even a year or more after a fire.

However, insurance policies contain various technical and substantive requirements that may jeopardize coverage if an insured does not honor them. Therefore, it is extremely important that an insured check the policy and reasonably attempt to comply with any conditions.

Notice. Most policies require that an insured notify its insurer "as soon as practicable" after a loss. This requirement is intended to give an insurer a chance to investigate a loss while the evidence is fresh. If an insured fails to provide timely notice, then the insurer may be excused from its duties.

However, a delay does not automatically result in a loss of coverage. Under state law, an insurer generally must show that late notice prejudiced it substantially before it may assert late notice as a defense to coverage successfully. In fact, "though an insurer may assert a defense based upon an alleged breach of the notice requirements of the policy, the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby." Downey Sav. & Loan Ass'n v. Ohio Cas. Ins. Co., 189 Cal. App. 3d 1072 (1987).

Duty to cooperate. Most policies contain a "cooperation" provision, stating that the insured is to cooperate in the insurer's investigation of a loss.

An insured's failure to cooperate could relieve an insurer of its duties. However, the insurer must prove that the breach substantially prejudiced it. Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 305-06 (1963) ("An insurer may assert defenses based upon a breach by the insured of a condition of the policy such as a cooperation clause, but the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.").

Proof of loss. Most property and fire insurance policies require an insured to provide a "proof of loss, signed and sworn to by the insured," including statements about the time and origin of the loss, the interest of the insured and others in the property and the property's actual cash value. Insureds usually must submit proofs of loss within a relatively short time -- often, within 60 days after the loss incepts or after the insurer requests a proof of loss.

Insureds should comply unless the insurer expressly waives it in writing. However, "all defects ... in preliminary proof [of loss] which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as ground of objection, are waived." Cal. Ins. Code Section 553.

Examinations under oath. Most property and fire insurance policies gives the insurer the right to conduct (by any person that it names, including outside counsel) an examination under oath "as often as may be reasonably required" about any matter relating to the insurance or the loss. The insurer also may require that the insured produce relevant books and records for examination. This means that the insurer can, in essence, conduct a deposition of the insured.

An insurer also may have the right to examine members of the insured's family under oath. See West v. State Farm Fire & Cas. Co., 868 F.2d 348, 351 (9th Cir. 1989) (request for statements from family reasonable in light of insured's failure to provide information).

Failure to submit to an examination under oath may excuse an insurer from paying for an otherwise-covered loss. See Cal. Fair Plan Ass'n v. Superior Court, 115 Cal. App. 4th 158, 167 (2004) (insured's claim barred when he failed to submit to examination under oath"). However, courts will examine the circumstances giving rise to the failure, and an insurer must exercise its rights to an examination in a reasonable manner. See Hickman v. London Assurance Corp., 184 Cal. 524, 533 (1920).

An insured that agrees to an examination under oath must keep in mind that the right to object to questions or refuse to answer or provide documents on the basis of a privilege or other reason may be limited. See id. at 534-35 (privilege against self-incrimination does not excuse insured from duty to submit to examination under oath). However, an insured has the right to be represented by counsel during an examination. See Cal. Ins. Code Section 2071.1(a)(4).

An insured also has a right to "assert any objection that can be made in a deposition under state or federal law. However, if as a result of asserting an objection an insured fails to provide an answer to a material question, and that failure prevents the insurer from being able to determine the extent of loss and validity of the claim, the rights of the insured under the contract may be affected." Id., Section 2071.1(a)(6).

Contractual limitations periods. Many policies contain a contractual limitations period: a specified time period within which the insured must bring any lawsuit regarding coverage. California's standard-form fire insurance policy states that an insured cannot file suit on the policy unless the suit is "commenced within 12 months next after inception of the loss."

However, this period often is tolled from the time that the insurer is notified until it provides its final coverage decision. See Prudential-LMI Ins. v. Superior Court, 51 Cal. 3d 674, 693 (1990). Thus, this requirement should not provide any immediate threat to coverage for losses from the recent fires.