USA – CALIFORNIA Trends and Developments Contributed by: Louisa Weix, Monique Ferraro and Hope Williams, TittmannWeix
Fire, Smoke, and Mud The “direct physical loss” question
layer carriers, and the insured’s proof that the excess layer is reasonably likely to be reached. It also gives policyholders leverage to argue that an excess insur- er’s pre-exhaustion conduct, such as refusing to par- ticipate in settlement discussions, delaying consent, or taking positions that impede access to underlying limits, can cause present harm even before indemnity is owed. In a second significant procedural case, City of River- side v RLI Insurance Co ., 119 Cal. App. 5th 405 (2026), the Fourth District reversed a demurrer, allowing an additional insured asserting contractual and bad faith claims to pursue them within the pending underlying wrongful death case. A pedestrian died after being struck by a vehicle, and the decedent’s family sued the City of Riverside. The City cross complained against its contractor and against RLI. The trial court dismissed the cross complaint in reliance on Royal Globe Ins . Co . v Superior Court , 23 Cal. 3d 880 (1979) which bars a plaintiff from suing an insured and its insurer together. The Court of Appeal distinguished Royal Globe as not applying where the party suing the insurer is itself an additional insured with contrac- tual privity, asserting its own first-party rights rather than a third-party stranger’s, meaning such disputes may be maintained inside the pending liability case. Thus, coverage disputes may be maintained inside the pending liability case, impacting how insurers manage joinder and jury-prejudice risk. Finally, in Bornoff v State Farm General Insurance Co ., No 22STCV23104 (Cal. Ct. App. May 1, 2026), the Second District held that an insurer’s eventual payment of benefits does not, by itself, defeat a bad faith claim where unreasonable delay caused sepa- rate economic harm. State Farm paid full benefits on a burglary/theft claim only after a four-month delay. Reversing summary judgment, the Court of Appeal held State Farm had not shown the absence of a tri- able issue as to whether the delay itself caused sep- arate losses. Claims-handling conduct is a distinct source of liability, separate from the coverage deci- sion itself. For insurers, the importance of thorough documentation and a demonstrably reasonable basis for timing decisions will be an important tool to defeat allegations of bad faith.
The most heavily litigated coverage question in Cali- fornia this year is whether smoke and ash affecting a building that did not itself burn constitute “direct physical loss”. No published decision has yet resolved that question for the January 2025 Los Angeles fires, still at the pleading and discovery stages, but three decisions from earlier wildfires already shape how those claims will be litigated. A federal court found smoke and ash infiltration could constitute physical loss under a commercial policy in Bottega , LLC v National Surety Corp ., No 3:21-cv-03614-JSC (N.D. Cal. Jan. 10, 2025) arising from smoke damage to two San Francisco restaurants in the 2017 North Bay fires. The court denied summary judgment to both sides on whether smoke contamina- tion “seriously impaired or destroyed” the restaurants’ function, though it granted judgment against two affili- ated entities that never suspended operations. The court distinguished the case from the COVID-19 prop- erty cases cited by the insurer, explaining that “smoke is more like asbestos and gases that physically altered the property”. A Los Angeles trial court reached a policyholder- favourable result on different grounds in Aliff v Cali - fornia FAIR Plan Association , No 21STCV20095 (L.A. County Super. Ct. June 24, 2025) (order granting partial summary adjudication) arising from the 2020 Mountain View Fire. The court held that policy lan- guage issued by the California Fair Access to Insur- ance Requirements Plan (FAIR Plan) requiring smoke damage to be permanent and visible or detectable by smell provided less coverage than California’s stand- ard form fire policy, and that the FAIR Plan could not lawfully exclude laboratory evidence of contaminants undetectable by the insured’s own senses. A published Court of Appeal decision reached the opposite result in Gharibian v Wawanesa General Insurance Co ., 108 Cal. App. 5th 730 (2025), arising from smoke and ash that reached a Granada Hills home during the 2019 Saddle Ridge Fire without burning it. The court held that “direct physical loss” requires a distinct, demonstrable physical alteration of property that cleanable soot and ash did not meet.
308 I NSURANCE L I T IGATI O N 2026
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