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By DAN REYNOLDS, senior editor of Risk & Insurance®

A California jury's verdict in the case of a 2002 wildfire might be setting a notable precedent.

The bulk of the sum, some $28.8 million, was awarded for "damages suffered by the environment." The habitat of the endangered red-legged frog and a historic mining camp were a part of the acreage destroyed.

According to the U.S. Attorney's office in Los Angeles, it is the first time a jury has awarded damages for environmental harm caused by a wildfire.

"I think this is a very, very important decision for two reasons. One, in my view it really represents an evolution of what society deems valuable," said Helen Eichmann, a New York-based director of Aon Risk Services Environmental Services.

"And now there is a mechanism where a government entity can say, 'Look, this is the loss of something valuable, and we are going to use our tort system and our legal system to seek redress," Eichmann added.

In the case of what is now known as the Copper Fire, which burned from June 5 through June 11, 2002, in San Francisquito Canyon in the Angeles Forest near Santa Clarita, sparks from an electric grinder had landed in dry brush near the site of a planned community housing project and started a conflagration.

The jury found that the contractors, the now defunct Merco Construction Engineers and the Texas-based CB&I Constructors Inc., failed to keep the area around the worksite dampened, a practice that is standard practice in the construction industry, particularly in dry, dusty Southern California.

Merco was a general contractor hired by the Newhall County Water District to construct four steel reservoirs for the housing project. CB&I, a subcontractor on the project, plans to appeal the decision.

NEW INSURANCE ISSUES

Although the word "environment" in the U.S. attorney's press release on the topic might conjure thoughts of a responding contractor's pollution liability, a fire that burns habitat is not in itself necessarily a pollutant, according to Eichmann and others.

Graham Smith, a Washington, D.C.-based environmental specialist with Wells Fargo Insurance Services, said commercial general liability policies should cover damages like those in the Copper Fire case.

"My take on this is that the (court's) demand really is just for the physical destruction of the environment and the fact that it got consumed by fire," he said, "and I think the commercial general liability policy should respond."

Seems reasonable enough. But in the intense political world of Southern California, we have already seen politicians pointing the finger at utilities for their possible role in the 2007 wildfires that burnt so much of San Diego County.

In those cases, San Diego Gas & Electric, a division of Sempra Energy, was found liable for more than $740 million in property losses when sparks from the utility's conductors and power lines were blamed for starting the blazes.

Now factor in damage to the environment itself, as this case in Santa Clarita has done.

"It is now deemed something of value, and it is not just brush land that got burned. It is something of value that the community at large experiences a loss that needs to be redressed and that it seeks compensation for," Aon's Eichmann said.

So, will this in essence create a new market? We have already seen instances where insurers demanded that Sempra's utilities pay for specific wildfire property damage in their general liability towers.

"From a market standpoint, it will be very interesting to see how the insurance market responds to this kind of decision," Eichmann said.

October 20, 2009

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