After the Fire: Assessing Coverage for Lingering Smoke Damage

By Anthony Merrill

Insurance is designed to relieve financial strain and provide peace of mind — a contractual promise that when a catastrophe strikes, a policyholder will receive the financial support to rebuild and recover. Unprecedented wildfires around Los Angeles have caused utter devastation and damage across Southern California. Thousands of people have lost their homes or been displaced, and businesses have suffered property damage and income loss caused by area closures and secondary damage effects of the fires. Businesses affected by the wildfires may be entitled to coverage under their insurance policies for business income loss stemming from smoke damage, even if they have not incurred fire damage. Insurance companies, however, may disagree, arguing that smoke-related damage is not a covered “physical loss.”

In two recent California cases, both policyholders sought coverage after wildfire smoke and debris affected their properties. One court ruled in favor of coverage. Bottega, LLC v. National Surety Corporation, No. 21-cv-03614-JSC (N.D. Cal. Jan. 10, 2025). The other sided with the insurer. Gharibian v. Wawanesa General Insurance Co., No. B325859, 2025 WL 426092 (Cal. Ct. App. Feb. 7, 2025). These contrasting decisions emphasize issues policyholders may face in securing coverage for smoke-related damage. At the heart of both cases is a fundamental question: What does it mean for a property to suffer “direct physical loss or damage” under an insurance policy?

Insurance companies often take a narrow view, arguing that physical loss requires structural damage. Policyholders argue that contamination such as smoke infiltration pervades property, rendering the property inoperable for its intended use and qualifying as a covered physical loss. Courts struggled with this question in the wake of the COVID-19 pandemic, which sparked thousands of lawsuits over business closures and contamination claims. No doubt that this debate will continue with the recent wildfires.

Bottega, LLC v. National Surety Corporation: A Win for the Policyholder

In Bottega, a Napa Valley restaurant faced significant disruptions after the 2017 North Bay Fires. Although the fires did not burn the restaurant itself, thick smoke, soot, and ash inundated the premises, forcing it to close. When it did reopen, for the next few months, it was limited to less than one-third of the seating temporarily because of the smell of the smoke, soot, and ash. The smell of fire remained for two years. The restaurant sought coverage under its commercial property insurance policy, which covered losses due to “direct physical loss or damage.”

The insurer argued that because the restaurant was still physically intact, it had not suffered a “physical loss” as required by the policy. The Court rejected National Surety’s narrow interpretation, holding that:

Unlike many legal decisions tied to COVID-19 which relied on the issuance of stay-at-home orders to conclude that the virus did not cause loss or damage, the Bottega Court found that the insured reopened during the state of emergency declared for the fire. It also described, in some depth, the nature and extent of the damage caused by the smoke. This holding confirms that when a business is uninhabitable, whether from noxious gases or wildfire smoke, there is a covered loss. Indeed, there is a long judicial history that the presence of smoke, noxious gases, and odors constitutes property damage and should be covered.

In Bottega, the policyholder’s success was largely due to strong evidence showing that smoke infiltration impacted business operations and required extensive remediation, causing the policyholder’s loss. 

Gharibian v. Wawanesa General Insurance Co.: A Win for the Insurer

While Bottega marked a win for policyholders, Gharibian v. Wawanesa illustrates a different approach. Homeowners in Granada Hills sought coverage after the 2019 Saddle Ridge Fire deposited wildfire debris around their home. Although the fire did not damage their home, their property was covered in soot and ash. Despite cleaning, smoke odors remained within the home.

Their insurer offered to pay for professional cleaning services but then denied additional coverage, arguing that there was no “direct physical loss to property” because the home was structurally intact. The Court sided with the insurer, emphasizing that:

These cases illustrate the fine line courts walk when deciding whether contamination rises to the level of a physical loss. Importantly, the nature of the damage matters. A structure that remains unfit for use, with a potentially lasting impact on the property, is more likely to be covered than a removable nuisance.

Wildfires raise critical questions about insurance coverage for smoke and debris damage. The rulings in Bottega and Gharibian show the continuing conflict over what is “direct physical loss.” While Bottega is a win for policyholders, Gharibian suggests that insurers will continue to push for restrictive interpretations. Policyholders should consider being proactive by documenting their losses, seeking expert opinions, and challenging questionable denials. Policyholders should be prepared to fight for the insurance coverage they believe they deserve.