A state-appointed panel advised last week that California should change the standard for determining whether utilities are liable for wildfires. Under the current system, California’s Public Utilities Code § 2106 provides a private right of action by any person or entity that has suffered loss, damages, or injury caused by prohibited or unlawful acts of a public utility. Relying on this statute, property owners have asserted wildfire-related claims directly against allegedly culpable electric utility companies. Public utilities in California also face inverse condemnation claims arising out of wildfires. Under inverse condemnation, where private property is taken for public use and later damaged by the state or its agency, the state or agency is strictly liable to the property owner.

In an effort to reduce the financial impact on public utilities resulting from wildfires—as exemplified by Pacific Gas and Electric Co.’s recent filing for Chapter 11 protection in January—the California Commission on Catastrophic Wildfire Cost and Recovery recommended changing the current laws to reflect a fault-based standard. According to the panel, this change would reduce the risk of bankruptcy and decrease the cost of capital. The commission also recommended establishing a wildfire victims’ fund and setting up an electric utility wildfire board to handle the prevention and mitigation of utility-related wildfires.

Electric utility companies, especially those located in areas prone to wildfires, should understand the liability risks they face in each state in which they operate in order to better evaluate their exposure to such risks and to ensure they have the right insurance in place to respond to such risks. As statutory standards for public utility liability evolve, public utilities must ensure that their insurance portfolio keeps pace. The forecasted increase in the frequency of wildfires, coupled with recent reports on utilities’ potentially insufficient insurance coverage and limits, suggests that utilities and their brokers may need to reevaluate the adequacy of limits, sublimits, and scope of coverage. Changes to wildfire liability regimes such as the one being proposed in California may affect both the risk and how insurance may respond to any liabilities. A robust and well-structured insurance coverage program should defray at least a portion of their wildfire-related liabilities and thereby reduce the impact of wildfire risks.