Episode 42 - Analysis of California Insurance Bulletin 2025-7

California Insurance Bulletin 2025-7 states the position that recent case law does not remove coverage for smoke damage claims. Bob Sallander is highly critical of the bulletin from the office of Insurance Commissioner Ricardo Lara, explaining that Bulletin 2025-7 misstates both Another Planet Entertainment, LLC v. Vigilant Insurance Company (Cal. Supreme Ct., 2024) 15 Cal.5th 1106 and Gharibian v. Wawanesa General Insurance Company (Cal. Ct. of Appeal, 2 nd Dist., Div. 2, 2025)
2025 WL 426092. Join Bob Sallander for his summary of case law and how Bulletin 2025-7 is founded upon faulty logic. 

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Transcript

Welcome. You are listening to Coverage Counselors In, a weekly podcast for insurance
claims professionals. This podcast is for educational and informational purposes only.
It should not be considered legal advice. No attorney -client relationship is created
or implied. For legal assistance, contact a lawyer licensed in your state. And now,
your host, Robert Sallender.
Hello, everybody. It's nice to have you here for this episode of Coverage Counsel is
In. Thanks for listening. My frequent listeners will remember my discussion in
Coverage Counsel is in episode 38. There, I talked about a case called Garibian vs.
Wabanesa General Insurance Company, where the California Second Appellate District held
that there was no coverage under a standard form homeowner's policy for the cost of
cleaning soot and smoke from an otherwise undamaged house. You might want to go back
and listen to that episode to put this episode in context, because the California
Insurance Commissioner seems to have taken notice of Wabanessa and issued a bulletin
about it. Not just that case, but some other cases as well. In bulletin 2025 -7,
the California Insurance Commissioner addresses coverage for smoke damage. Though,
in my opinion, the content of that bulletin is really weak.
In a non -binding statement, the Commissioner says that the Wamanese case and others
do not support the position that smoke damage is never covered as a matter of law.
Well, that's a true statement and not to be too colloquial or familiar.
it's kind of like a "Duh" statement. Of course, the Wawa Nesa case does not stand
for that proposition. I think we all learned in elementary school that the correct
answer to a question that uses the word "never" in it is always "no." The question
in Wawa Nesa, like all coverage cases, was whether that policy covered those claims.
The Wawa Nesa accord did not attempt to fashion a blanket rule for all smoke cases
under all policy language. It's also interesting that the Commissioner does not
disagree with the outcome of Wawa Nasa. He doesn't say it was wrong. He doesn't say
it was poorly reasoned. He doesn't disagree with the outcome one bit.
He just doesn't like the outcome it seems. The Commissioner makes the following false
statement, and let me put this into context for a minute. Wawa Nessa relied on a
California Supreme Court case called another Planet Entertainment versus Vigilant
Insurance Company. If you want to read that case, you can find it at 15 Cal 5th
6. The Commissioner makes the following false statement about the California Supreme
Court's holding in another planet. Here's what he says, I quote,
"The California Supreme Court's decision in another planet confirms that smoke damage
can be covered for a policy ensures against, quote, direct physical loss of or
damage to end quote property or substantially similar terms. That's the end of the
quote from the California Insurance Commissioner and it's wrong.
The decision on another planet does no such thing. That case didn't even involve a
claim of smoke damage. So it doesn't confirm that smoke damage can be covered at
all. It doesn't address smoke damage or any of the variations of smoke damage such
as soot damage. It just doesn't deal with the issue that the insurance commissioner
is trying to address in bulletin 2025 -7.
Rather in another planet the court was dealing with the COVID -19 virus and not only
did another planet not involve smoke damage, it held that for the COVID -19 virus,
there was not coverage under the circumstances of that case. Here's what the Supreme
Court said. Again, I quote, "We conclude consistent with the vast majority "of courts
nationwide that allegations of the actual or potential presence of COVID -19 on an
insurance premises, do not, without more, establish direct physical loss or damage to
property within the meaning of a commercial property insurance policy.
Some of that bears repeating. I finished the quotation, but the California Supreme
Court first of all says that it's agreeing with the vast majority of courts
nationwide, so suggesting that this is not a particularly disputed or difficult issue.
The next thing that the Supreme Court says in another planet is that it's dealing
with allegations of actual or potential presence of COVID -19 on an insurance
premises. It wasn't even proven in that case that the COVID -19 virus was present.
In fact, the insured was looking for business interruption insurance, claiming that
the shutdown required by the California government because of the potential presence
of the virus was not direct physical loss or damage to property.
And then the final point I'd like to make from the Supreme Court's quotation was
that it said actual or potential presence of COVID -19 on an insured's premises do
not without more established the physical injury component of coverage under the
property policy. So it wasn't even saying that if COVID -19 was present there would
be no coverage or there would be coverage, what it was really saying is you have
to prove more. If you're the insured, you have to prove more than just somebody
thinks the virus is present. So again, another planet does not deal with smoke
damage. It doesn't deal with any after effects or side effects of a fire.
It doesn't deal with a property that was actually physically injured,
it deals with an allegation that there might be COVID -19 present.
So when the insurance commissioner says that the case confirms that smoke damage can
be covered, it's just misre... He's just misrepresenting the holding of the case. The
insurance commissioner's statement about another planet is a misrepresentation for an
additional reason.
sentence from another planet that follows the holding. The Supreme Court said, quote,
"Under California law, direct physical loss or damage to property requires a distinct,
demonstrable physical alteration to property. The physical alteration need not be
visible to the naked eye, nor must it be structural, but it must result in some
injury to or impairment of the property as property.
So the insurance commissioner takes that statement, that sentence, that follows the
actual holding to take the decision in another planet out of context and say that
it supports or confirms, sorry, confirms that smoke damage can be covered.
It's just a blatant misreading and misapplication of another planet.
Now what the insurance commissioner could have said is that the California Supreme
Court's decision suggests that smoke damage,
if it's shown to have resulted in a physical alteration to the property,
even though invisible to the naked eye and non structural, but some injury to or
impairment of the property as property, the smoke damage might be covered. That's
what the insurance commissioner should have said, but Bulletin 2025 -7 reads more like
a, maybe I'd call it a brief or a opinion statement rather than a true and
unbiased statement of the current state of law. The commissioner's selective quotation
from another planet, and again if you want to read it yourself you can see it at
15 cal 5th at page 1117, it actually supports the Wawa Nessa holding.
What you might remember or learn from episode 38 of Coverage Counsel is in,
is that Wawa Nesa moved for summary judgment that there was no coverage because
there was no evidence of direct physical loss to the homes. According to the Court
of Appeal in that Wawa Nesa case, the homeowners had the burden of showing there
was a "direct physical loss to property" to find as a distinct demonstrable physical
alteration to the property. You see, the Wawa Nesa case was applying the same
standard that the California Supreme Court was applying in another planet.
Back to Wawa Nesa, the Court of Appeals, as well as the trial court found that
plaintiffs failed to meet this burden because, according to the court, all evidence
indicated that the debris was easily cleaned or removed from the property.
So there's nothing in bulletin 2025 -7 that says smoke damage alone is covered.
There's no assertion that Wawa Nessa was wrong, that it should have been decided
differently. There's just a statement that seems to lead people to believe that the
insurance commissioner is disagreeing with these court decisions. So after
disingenuously stating that another planet confirms, and that's the insurance
commissioner's word, confirms that smoke damage can be covered. The commissioner then
refers to a notice he issued on February 14, 2025, concerning additional living
expenses when homes are uninhabitable. Well, wait a minute. A home that is
uninhabitable may not have sustained direct physical loss. So the insurance
commissioner is talking apples and oranges. An undamaged house may be uninhabitable
because utilities are unavailable or it is located in an area civil authorities deem
unsafe. These are precisely the conditions that exist in some parts of Los Angeles
because of the recent fires. These conditions that render an otherwise undamaged
property uninhabitable, may entitle displaced homeowners to additional living expense
coverage, even where they are not entitled to coverage for smoke and soot cleanup
because there's no physical damage to the property. Therefore, again, the insurance
commissioner is being quite misleading in referring to a notice to support a bulletin
that misstates the state of the case law on coverage under property policies for
smoke damage. For these reasons, in my opinion, the commissioner's bulletin 2025 -7 is
misleading and is likely to cause more problems than it solves. Undoubtedly there are
going to be some homeowners who based on the bulletin mistakenly think that they
have coverage. They may think that the bulletin has the force of law or is somehow
binding on a court. It is not. It is not binding legal precedent. It's an opinion
by the insurance commissioner that no court is obligated to follow. A court may look
at it may try to determine whether its reasoning is persuasive.
But I think as I have shown, its reasoning is not persuasive because it
misrepresents cases and relies on other coverages that don't require the same sorts
of elements that physical damage to a property requires.
And I suspect that there will be some attorneys who base litigation on the bulletin
and want to use it as binding precedent for these homeowners who mistakenly think
that their smoke damage, and I put damage in quotes, is covered. If smoke can be
cleaned off and there's no residual physical alteration damaging, changing the nature
of the property as property. It looks like there's not going to be any coverage. So
in the end, I think the most accurate statement in Bulletin 2025 -7 is this,
"Whether a particular claim for smoke damage is covered depends on the specific
policy language and the unique facts of each claim." I don't know why the insurance
commissioner felt the need to issue bulletin 2025 -7,
but it does not change the state of the case law on coverage for smoke or soot
impairment of a home without associated physical injury.
Well, thanks for listening to this episode of Coverage Counsel is in, and until next
week, this is Bob Salander signing off. Bye bye.