Subrogating for Change

Natural disasters such as hurricanes, landslides, floods, and wildfires, have become common occurrences in today’s America. In fact, many of these disasters are predictable, and most even have a dedicated season such as in California, where the typical wildfire season runs from May through October. While more wildfires occur in the East (including the Midwest), the wildfires in the West—which includes Alaska, Arizona, California, Colorado, Idaho, Montana, New Mexico, Nevada, Oregon, Utah, Washington, and Wyoming—are larger and burn more acreage, according to statistics from the Congressional Research Service. In particular, during the 2020 wildfire season, Oregon, California, and Washington have been devastated by over 40 large wildfires and counting.

Forest fires have always played an integral role in nature’s ever-evolving cycle. Unfortunately, human interaction with nature, and our encroachment into heavily forested areas, has brought about devastating results with an increase in acreage burned and economic damages. According to the U.S. Department of Interior, 90 percent of wildfires in the United States are caused by people. However, these human-caused fires are not always the out-of-control camp fires that Smokey Bear warned us about. Rather, devastating wildfires all too often are caused by corporate and government actors. When the negligent “people” are large corporations acting without regard to the damages they cause, subrogation can bring about accountability.

Wildfire Subrogation Feasibility

At the turn of the century, there was a distinct and drastic increase in the number of acres burned from wildfires in the United States. From 1980 to 2000, wildfires in the United States burned approximately 3.2 million acres per year, according to the National Interagency Fire Center (NIFC). The NIFC reports that this average dramatically increased to approximately 6.8 million acres per year during the next 20 years. Over the last 10 years alone, the U.S. Fire Administrations reports that damages from these wildfires exceed $50 billion in today’s dollars. Additionally, the Insurance Information Institute (I.I.I.) reports that the top five costliest wildfires in the United States all occurred in California in 2017 and 2018. Experts investigating these fires (including many of the 2017 North Bay Fires, the 2017 Thomas Fire, and the 2018 Camp and Woolsey Fires) determined that utility company equipment contributed to the cause of the fires. Through subrogation, these utility companies are being held accountable and forced to improve the way they do business.

As most of us know, subrogation is a common-law concept that places the insurer in the “shoes of the insured” as to the insured’s claims against third parties, as noted in Allstate Ins. Co. v. Mel Rapton Inc. (2000) 77 Cal.App.4th 901, 908. Under the doctrine of subrogation, when an insurer pays money to its insured for a loss caused by a third party, the insurer succeeds to its insured’s rights against the third party in the amount the insurer paid, as determined in Rossmoor Sanitation Inc. v. Pylon Inc. (1975) 13 Cal.3d 622, 633-634. As it relates to wildfires, once an insurance company pays its insured for damages caused by the fire, the insurance company has the right to pursue a recovery against any third party responsible for starting the fire. As such, subrogation serves the dual purpose of enforcing accountability and bringing about change.

Subrogation Steps for Success

The first step in a successful wildfire subrogation case is to identify the responsible third party. This requires the use of wildfire origin-and-cause experts who need access to the area of origin as soon as possible. Delay in starting the investigation can result in the loss of evidence through firefighting activity, weather, or human interaction. Once potentially responsible parties are identified, a decision must be made on whether pursuit of subrogation is economically feasible. Investigative and litigation costs for wildfire subrogation typically run in the hundreds of thousands of dollars. As such, if the potentially responsible party is not collectible, then the subrogation investigation is likely to end. On the other hand, where the potentially responsible party is either a government-owned or privately-owned utility company, such as a gas, electric, or water company, the subrogation investigation can move forward.

One of the most critical early steps in a wildfire subrogation case is to ensure the preservation of evidence. This should start even while the wildfire continues to burn. When electrical utility companies are implicated in the start of the fire, their priority during the initial stage of the fire is the preservation of their own equipment and restoring power to their customers. If allowed, utility company workers might enter into the area of fire origin, remove or replace equipment, and dispose of damaged equipment that may be critical to the causal investigation. This equipment is now lost forever, significantly reducing the chance of successful subrogation. Notice and preservation letters must be sent to the potentially responsible parties and even security posted around the area of origin to prevent the destruction of evidence. Once all interested parties are identified, a joint inspection of the area can proceed. After this joint inspection of the area of origin, the physical evidence is tagged and preserved for further examination by forensic fire and engineering experts in a laboratory setting, and saved for use at a potential trial.

Next, it is important to understand the laws of the state in which the wildfire occurred. If the potentially responsible party is a governmental entity, then there are likely shortened notice requirements with specific language necessary in order to preserve a future claim. Some states provide protection for governmental actors through immunity; others treat privately-owned corporate utilities as quasi-governmental entities and may extend governmental immunity protections for their negligent acts. States with strong governmental immunity protections decrease the potential for a meaningful recovery and may even bar recovery in cases of clear liability if all notice requirements of the immunity statute are not followed.

Other states, however, have adopted a more progressive approach to the liability of the utility companies, even going so far as to hold them accountable by means of inverse condemnation—a near strict liability standard. California is one such progressive state. Given that the five costliest wildfires in the United States all occurred in California, and all five implicated an electrical utility company as the cause of the fire, it is appropriate to look closer at the California wildfires and the laws surrounding wildfire subrogation.

Golden Bear State of Affairs

In California, electric utility companies are considered quasi-governmental entities because of their ability to take private property by means of eminent domain. In other words, a utility company has the power to force an unwilling property owner to sell their property for a reasonable price for the good of the whole community. The utility company can take the land to erect poles, run cable, dig ditches, and clear land. As a balance, where the utility company, through its operations for the benefit of the whole community, causes damage to private property, it is responsible to pay for that damage.

For over 20 years, California law has held that the transmission of electrical power is an established public use [see Barham v. Southern California Edison (1999) 74 Cal. App. 4th 744, 752]. The “Takings Clause” of the California Constitution states, “Private property may be taken or damaged for a public use only when just compensation…has first been paid.” Art. 1, Sec. 19(a). When property is taken without just compensation for the public use, the property owner has the right to force payment. This is called inverse condemnation.

In California, when a utility company causes a wildfire that damages private property, it is required to provide just compensation to the property owner under the doctrine of inverse condemnation. The damage caused by the fire is considered a taking of private property for public use, which therefore requires just compensation. Unlike tort claims, inverse condemnation does not require a showing of negligence or wrongdoing in order to recover. Additionally, both pre-judgment interest and attorneys’ fees are recoverable under a theory of inverse condemnation. As such, inverse condemnation is a powerful tool for both individual property owners and their insurance companies attempting to recover through subrogation for wildfire damage caused by a utility’s equipment.

When an electric utility fails to maintain its equipment, or the vegetation in and around the equipment, and that leads to a wildfire, the utility can also be held liable for its own negligence in causing the fire. Over the past 10 years alone, the California Department of Forestry and Fire Protection (CalFire) and forensic experts working on behalf of the property owners and subrogated insurers have found numerous fires that resulted from a utility company’s negligent maintenance of its equipment and the vegetation impacting that equipment. In many instances, CalFire found utility companies failed to replace damaged conductors; failed to replace equipment well beyond its useful life; failed to remove diseased and dead trees that clearly posed a threat to the conductors; and failed to properly clear brush around their equipment, which provided fuel for a fire when their equipment failed. Subrogation has forced these utility companies to upgrade their systems and change their policies in efforts to eliminate many of the conditions giving rise to their equipment causing fires.

In California, the doctrine of inverse condemnation and the insurance industry’s successful use of that doctrine in subrogation holds large utility companies responsible to the public at large. Due to the significant costs associated with investigating the cause of these devastating fires and litigating against these large corporate actors, it is unlikely utility companies would be held accountable without subrogating insurers leading the way. A person owning a home up in the hills of California could never afford the cost of holding a utility company responsible for the damages it caused. Consequently, subrogation serves a much greater purpose than recovering money for insurance companies; it forces corporate actors to be accountable for their actions and protects the public at large. Therefore, the importance of subrogation only increases as future wildfire seasons last longer and become more intense.