Wildfire season is here: will your company’s insurance policy stand up to the heat? | Procopio, Cory, Hargreaves & Savitch LLP

[co-author: Amanda Chavez]

Wildfire season typically occurs between July and November in California. However, the California Department of Forestry and Fire Protection maintains that global warming is causing wildfire seasons to start earlier and last longer. In 2021 alone, wildfires burned an estimated 2.6 million acres across California. The damage caused by forest fires continues to increase, year after year. How many homeowners were properly insured and how many will be as conditions continue to change?

We are approaching this year’s wildfire season, and it will likely be another bad season. Fortunately, there’s still time to make sure your business and commercial assets are adequately covered by your insurance policy.

Below are some policy provisions you should be aware of, an explanation of the importance of having an annual insurance check, and some key preventative steps you can take to protect your business assets.

Policy provisions and coverages to be aware of

Beware of coinsurance provisions and penalties for underinsurance, as well as business interruption coverage. These are policy provisions that all commercial property owners should be aware of in order to adequately protect your businesses from wildfire threats.

Some commercial property insurance policies contain a coinsurance clause. If such a clause exists, insuring the property for too little will subject the insured to a potentially significant penalty. The purpose of these clauses is to ensure that the property is properly insured at an appropriate value and that the insurer receives a fair premium for the risk to be insured.

Coinsurance is usually expressed as a percentage. For example, an 80% coinsurance clause would require that a building valued at $1,000,000 be insured for at least $800,000. If the property is underinsured, the policyholder will be subject to a co-insurance penalty, calculated according to a formula set out in the policy. Co-insurance clauses may also apply to business interruption coverage; it is therefore very important to ensure the flow of income from your business at a precise level.

Business interruption coverage is included in many commercial property insurance packages. This type of coverage has become more commonly invoked during the Covid-19 pandemic, but traditionally works to protect business owners in the context of perils such as wildfires. Business interruption coverage allows a policyholder to recover losses incurred by the business due to various forms of business interruption. The type of recovery allowed varies from policy to policy, although loss of profit is often included.

Often, business interruption coverage will allow an insured to recover from a loss even if the insured property suffers no physical damage. For example, there may be coverage for lost profits or additional expenses if the business was forced to evacuate due to a threatening wildfire, even if the wildfire never reached the property. Therefore, it is imperative to know whether your policy contains business interruption coverage and how much you are covered if your property were to be affected by a wildfire.

The importance of carrying out an annual insurance check-up

An annual insurance check involves calling your broker or insurance company to discuss the limits and coverage of your current policy. Although doing it on a yearly basis may seem like overkill to some, this yearly review will likely save you money in the long run.

The terms of your insurance policies may change from year to year, just as your business may change each year. Therefore, the policy provisions, coverages and limits that worked best for you last year may not be what you need this year. Additionally, certain changes to the physical property itself should be reported to your insurer to ensure complete and appropriate coverage. Some policies contain requirements, such as the installation of sprinklers in the building, as a condition of coverage under the policy.

With respect to coinsurance, changes to your business or income may affect the amount of coverage required under your policy.

By performing an annual health check, you will put yourself in the best possible position to deal with the disaster that a wildfire can wreak on your business and property.

Preventive Measures Businesses Can Take for Fire Season

As a business owner, it is also extremely important to take preventive measures to prevent or limit the damage that a fire could cause to your property.

You should pay particular attention to surrounding areas within five feet of your building. Removal of dead vegetation or debris and removal of objects of combustible materials from this area will limit potential damage from a fire.

Choose noncombustible materials for sections of the property such as signs and decks. Install screens over vents to prevent embers from entering your building. Also, clean regularly and use non-combustible materials for roofs and gutters.

Finally, if your building does unfortunately catch fire, it will make a big difference if you have created a clear path for firefighters to access your property and previously confirmed that there are fire hydrants near your main building. Make sure these fire hydrants are also connected to a reliable water source. Additionally, the installation of sprinklers is not only required under certain policies, but sprinklers will be beneficial in the face of a wildfire for almost any commercial building.

Implementing some or all of these preventative measures will not only physically protect your property from fire damage, but taking such measures may even save you money on the cost of insurance. California’s recently proposed insurance regulations regarding wildfire safety and reduced insurance costs underscore the importance of insurance companies encouraging homeowners to take proactive action. Business owners who don’t follow these initiatives may even face higher premiums, as insurance companies may take into account preventative safety measures in place when determining a company’s “fire risk score”. forest” of the property.

Conclusion

Although the policies vary widely, these are starting points for the ways you, as a business owner, can protect your business and your assets. Additional assistance from an insurance practitioner who can interpret the nuances of your specific policy may prove invaluable as we move forward into what is likely to be another record wildfire season.


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Justin D. O'Neill