State Farm faces probe over wildfire claims handling

Attorneys praised the announcement that the state's insurance regulator was investigating State Farm's handling of claims stemming from the January wildfires but cautioned that its impact on litigation would be anything but certain.

"Part of me worries these are just words, a political or PR move to calm people down and to placate other politicians," Kabateck LLP's managing partner Shant A. Karnikian said Friday. "If the California Department of Insurance or Legislature does something here, it will be a much-needed course correction after Gharibian."

Karnikian was referring to an appellate ruling that homeowners who filed claims stemming from the 2019 Saddle Ridge fire were not entitled to loss of property damages from their insurance company because they failed to show that smoke, soot and ash from the fire altered their property in a lasting manner. Hovik Gharibian, et al. v. Wawanesa General Insurance Company, B325859 (2nd Cal. App, filed Feb. 7, 2025).

The decision sets a dangerous precedent and could make it more difficult for policy holders to collect on their claims, plaintiffs' attorneys say. The California Department of Insurance launched a task force last month to look into the matter.

Kabateck LLP is helping State Farm policyholders resolve their claims, and those efforts have not yet led to litigation. Information that comes out of the investigation might be persuasive in court, but it is not binding, Karnikian said.

"I've done insurance bad faith trials and brought up the fact that the carrier was investigated by the California Department of Insurance a number of times. In front of a jury, it's compelling," Karnikian said.

Insurance Commissioner Ricardo Lara announced the formal investigation on Thursday in a news release saying a "Market Conduct Examination" typically takes several months. But the timing and the scale of the Eaton and Palisades fires in Los Angeles County will allow investigators to conduct a more thorough review, according to the announcement. Insurers are making decisions about those claims, which will help investigators evaluate adjuster practices and assess how State Farm addresses all kinds of claims.

The news release noted that national standards for claims handling can be vague and inconsistently applied, particularly in large-scale disasters. The Eaton and Palisades fires destroyed over 37,000 acres in areas surrounding Altadena and Pacific Palisades, destroyed over 16,000 structures and led to 29 deaths. Insurance companies have paid nearly $17 billion to residential and commercial insurance policyholders harmed by the Eaton and Palisades fires as of May 12.

"This examination will assess whether State Farm has complied with California's consumer protection and claims handling laws and will help determine if further reforms are needed as natural disasters increasingly disrupt insurance markets across the country," Lara is quoted as saying.

State Farm issued a statement saying it was cooperating with the investigation: "A fair review will find that thousands of State Farm customers are being helped by our teams on the ground in Los Angeles County and are very satisfied."

Some wildfire victims have said that insurers were dragging their feet and underpaying claims. AAA and USAA are accused of underinsuring homes and misleading the owners about replacement costs. Lawsuits against the state's insurer of last resort, the California FAIR Plan, are piling up in Los Angeles.

Some State Farm clients have said that the company is offering to pay only fractions of what it costs to repair and clean homes that were damaged by the Eaton and Palisades fires and described its claims process as difficult and frustrating.

The decision to investigate State Farm shows that complaints to the California Department of Insurance are not a worthless exercise and can prove that violations are not isolated but a companywide problem, said Daniel J. Veroff, senior managing attorney with Merlin Law Group.

"The smoke claims task force presents a real opportunity to develop an industry standard approach to proving and valuing these claims. The lack of an industry standard means your claim could be handled differently than your neighbor's identical claim," Veroff continued.

Reed Smith partner Benjamin R. Fliegel said there was a possibility that the Department of Insurance will clarify how it expects insurers to handle claims for homes that are still standing but are not safe to live in.

"We hope that the department's investigation and report will be made public so it will provide a common reference point about what a reasonable investigation looks like, and what types of claim handling conduct is improper," he said. "Clear guidance on good faith claim handling practices should push insurers to pay policy benefits faster and reduce the need for litigation between policyholders and insurers who might be reluctant to pay."