LA Fires: Navigating Contingent Business Interruption Coverage
By Zelle LLP
March 24, 2025
The devastating fires that ignited across the Los Angeles area in early January have left a trail of destruction, impacting thousands of homes and businesses throughout the region. Communities have faced ongoing evacuation orders and warnings as they grappled with the immediate threats to property. Even areas outside the direct path of the flames experienced disruptions from curfews and closures, as well as the hazards of toxic ash and chemicals falling from the sky. The County of Los Angeles periodically issued advisories regarding windblown dust and ash.
With a significant portion of the affected area being residential, many businesses also sustained damages. As a result, some commercial insureds are expected to file property insurance claims for time element losses due to the damage in the region. One provision that is likely to be invoked by some claimants is contingent business interruption (CBI) coverage. Though CBI has existed in the insurance market for quite some time, it is considered a relatively new product with limited case law to interpret the scope of coverage.
Nine years after our previous article on CBI, we revisit the principles and potential application challenges outlined in our 2016 piece, anticipating the submission of CBI claims related to the L.A. fires. We’ll examine the impact of California’s COVID-19 case law and address the triggering phrase “direct physical loss or damage” in the context of CBI claims. We will also consider supplemental coverage questions surrounding these claims. The varied wording formulations in the commercial property insurance industry, coupled with the lack of comprehensive case law to guide interpretations, and numerous unique damage scenarios, render the outcomes of potential CBI claims submitted due to the LA fires uncertain.
What is Contingent Business Interruption (CBI)?
Typical CBI provisions cover losses resulting from the “necessary interruption” or “necessary suspension” of an insured’s business, caused by “direct physical loss of or damage” to property “of the type insured.” This coverage typically requires that the “property of the type insured” belongs to the insured’s “direct” suppliers or customers, or both “direct” and indirect suppliers or customers. Coverage is triggered when direct physical loss or damage to the supplier’s or customer’s property prevents the supplier from delivering goods, or the customer from receiving goods or services.
It is important to note that, policies vary in how “indirect” suppliers or customers must be in privity with the insured. In the instance of the L.A. fires, a policyholder seeking CBI coverage will likely need to provide evidence that fire caused direct physical loss or damage to the property of one of the insured’s “suppliers” or “customers,” and, as a result, prevented that supplier or customer from supplying or accepting goods or services from or to the insured. The insured must also demonstrate a causal link between the damage and the insured’s “necessary” business suspension. However, the application is not always straightforward.
What Constitutes “Direct Physical Loss or Damage”?
First, it is important to consider the “direct physical loss or damage” trigger. During the COVID-19 pandemic, many policyholders claimed that the virus damaged their property or third-party property by adhering to and altering the property’s molecular characteristics. The Supreme Court of California weighed in on the definition and ruled that “direct physical loss or damage to property requires a distinct, demonstrable, physical alteration to property.” The physical alteration need not be visible, nor must it be structural, but it must result in some injury to or impairment of the property as property. Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106 (2024).
Regarding COVID-19, even if the virus bonded to or altered property on a microscopic level, this did not cause any injury to the property, which “remained unaffected by the presence of the COVID-19 virus.” Id. at 308. In California, mere loss of use of property does not satisfy the direct physical loss or damage requirement. The Another Planet ruling acknowledged that “[i]n rare situations, a property may suffer direct physical loss where it is not damaged in a conventional sense, including where a chemical contaminant or noxious odor infiltrates the property and renders it effectively unusable or uninhabitable.” 548 P.3d at 308. Such a scenario may arise when the effect of the contaminant or odor is so lasting and persistent that the risk of harm is inextricably linked or connected to the property.
An insured seeking coverage for damage to supplier or customer property that has burned to the ground will easily establish “direct physical loss or damage.” But what about properties still standing that are intangibly affected by smoke, ash or other fire byproducts? Will California courts distinguish between the COVID-19 scenario and the perils of smoke, ash and the like, for purposes of CBI coverage?
In Oregon Shakespeare Festival Association v. Great American Insurance Co., a federal trial court found that the infiltration of wildfire smoke into a playhouse made it “uninhabitable and unusable” for holding performances. 2016 WL 3267247 (D. Or. June 7, 2016). However, a California court distinguished the smoke damage in the Oregon Shakespeare Festival case from the claimed COVID-19 “damage” at issue in a case before it. Inns-by-the-Sea v. California Mut. Ins. Co.,71 Cal. App. 5th 688 (2021). The court in Inns-by-the-Sea noted that COVID-19 on the insured’s property was not what rendered the premises uninhabitable or unusable. Rather, the government orders caused the suspension. Under California law, will smoke-related impacts on a property be treated like a virus, or like ammonia gasses or asbestos?
The Northern District of California recently suggested that these impacts are more akin to the latter. In Bottega, LLC v. National Surety Corporation, a restaurant group submitted a claim for coverage after its restaurants closed following a declaration of a State of Emergency relating to the 2018 North Bay Fires. 2025 WL 71989 (N.D. Cal. Jan. 10, 2025).
Despite the Bottega court’s statements regarding smoke damage, we expect the question of whether a property has suffered direct physical loss or damage from ash or smoke infiltration stemming from the L.A. fires to be highly fact-driven, with results dependent upon factors including the proximity of the property to the fire, weather considerations, and property-specific analyses for smoke, ash and char particulates to determine whether the presence of substances is “evanescent” or not. See Verveine Corp., 184 N.E.3d at 1276 (“evanescent presence of a harmful airborne substance that will quickly dissipate on its own…does not physically alter or affect property”).
In Shirley v. Allstate Insurance Co., 392 F. Supp. 3d 1185 (S.D. Cal. 2019), the court granted summary judgment in favor of an insurer on a claim for smoke damage from wildfires, as none of the experts that examined the insured’s home found evidence of soot, ash or char contamination. Whether the claimed damage can be cleaned easily may also be relevant. However, an insured will not be able to rely on general fire damage in the vicinity to establish coverage; it must tie its business loss to specific damage, not generalized conditions or a customer or supplier’s “loss of use” of their property due to evacuation orders or economic conditions.
Who is a “Supplier”?
Assuming direct physical loss or damage exists, whose property or what property must be damaged to trigger CBI coverage? According to jurisprudence, what constitutes a “supplier” or “customer,” and the proximity required to trigger claims can be fact-driven. The cases discussed in our prior CBI article are still relevant to this issue.
Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534 (S.D. Ill. 1996) and Millennium Inorganic Chemicals Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 744 F.3d 279 (4th Cir. 2014). Archer-Daniels-Midland (ADM) shows that unless a policy clearly requires a “supplier” to have a direct connection to the insured, a court may not impose this limitation. ADM arose out of significant flooding of the Mississippi River that damaged farmland in multiple midwestern states and impacted river transportation. ADM, a farm-product producer, submitted claims for increased transportation and raw material costs which it incurred after barge traffic was halted.
The CBI provisions at issue covered loss “caused by damage to or destruction of real or personal property…of any supplier of goods or services which results in the inability of such supplier to supply an insured location[].” The parties disputed whether the US Coast Guard and the Army Corps of Engineers were “suppliers” of the “service” of transportation on the Mississippi River. The court found they were, finding the phrase “any supplier of goods and services” unambiguous, meaning “an unrestricted group of those who furnish what is needed or desired.” ADM, 936 F. Supp. at 541. The court concluded that improving rivers for navigation is a “service.” The court found it irrelevant that ADM did not have contracts with the Coast Guard or Army Corps of Engineers, since the policy language broadly referred to “any” suppliers. The court also held that farmers that grew the crops were “suppliers of goods and services,” even though ADM bought their grain through intermediary dealers, because the policy language did not limit coverage to “direct suppliers” or “contractual suppliers,” but, again, “any” suppliers.
Millennium Organic demonstrates that even if a policy restricts coverage to “direct” suppliers, the meaning of “direct” can be disputed. In that case, the insured, a titanium oxide processing plant, purchased natural gas to run its operations from a retail gas supplier called Alinta. Alinta bought its supply of gas from various entities that would inject their gas into a natural gas pipeline, at which point Alinta took ownership of the gas. One of the gas suppliers was Apache Corporation. During the policy period an explosion occurred at Apache’s facility, shutting down gas production indefinitely. As a result, Millennium’s gas supply was curtailed and it was forced to shut down for several months.
Millennium submitted a CBI claim under language that insured against loss “caused by damage to or destruction of any of the real or personal property…referred to as CONTRIBUTING PROPERTY(IES)…which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium] and results directly in a necessary interruption of [Millennium’s] business.” The Fourth Circuit found the term “direct” unambiguous, meaning “proceeding from one point to another in time or space without deviation or interruption,” and “transmitted back and forth without an intermediary.”
In the context of potential CBI claims stemming from the L.A. area fires, insureds may seek CBI coverage based on attenuated supplier and customer relationships that do not trigger coverage. Both the specific CBI language and the facts of these business relationships will be critical in determining coverage.
What is the “Supply”?
In the absence of policy language that that defines the material(s) “supplied,” courts have generally declined to impose limitations on what it means to supply goods or services to an insured. The cases cited in our prior article on this issue are still instructive.
Pentair, Inc. v. Am. Guarantee & Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), Park Electrochemical Corp. v. Cont’l Cas. Co., 2011 WL 703945 (E.D.N.Y. Feb. 18, 2011). In Pentair, a U.S. company sought CBI coverage after an earthquake struck Taiwan, disabling an electrical substation and preventing a Pentair supplier from manufacturing products for two weeks. The Eighth Circuit ruled that the Taiwanese power company “did not supply a product or service ultimately used by Pentair. Thus, it was not a Pentair supplier…because it supplied no goods or services to Pentair, directly or indirectly.” Pentair, 400 F.3d at 615. In Park Electrochemical, an insured manufacturer of a technical component called an “N6000” sought CBI coverage after its own Singapore subsidiary that supplied a component of the N6000 product had a factory explosion.
The lesson of Park Electrochemical is that, absent clear limiting language, if the provider of a “supply” is the insured’s own subsidiary, there may be coverage even though this is not the usual intent of CBI coverage.
Since our 2016 article, there have been no significant published opinions further addressing these issues. We expect that courts applying California law that are faced with CBI claims arising out of the L.A. fires will look to these foundational cases for guidance in determining whether a third party is a supplier or customer of an insured and whether the product or service is provided “to” the insured.
What is a “Necessary Suspension”?
Like standard business interruption coverage, CBI provisions often contain “necessary suspension” or “interruption” language meant to ensure the physical damage at issue actually caused a suspension of operations of the insured. Whether the third-party property damage led to a “suspension” of operations can certainly be a disputed issue in a CBI case. In California, the Court of Appeal, Second District has held that “suspension of operations” means total cessation of business activities at an insured’s premises, rather than a slowdown. Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App. 4th 434, 126 Cal. Rptr. 2d 682 (2002). Once again, the specific policy language at issue will be critical.
Conclusion
Given the scope and scale of the devastation in the Los Angeles area and the many industries that call the area home, it is a near certainty that there will be CBI claims arising out of the 2025 fires. The availability of CBI coverage for those claims will depend upon the policy language and the specific facts of each claim. As claims arise, insurance professionals should engage in a full analysis of the policy language in light of existing jurisprudence and undertake a full investigation of the facts of the claimed loss to understand how that language will apply.
