Related Practices

The L.A. Fires: Contingent Business Interruption Coverage Considerations

March 24, 2025

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The Los Angeles area fires that started in early January have destroyed thousands of homes and businesses throughout the region.[1] The fires triggered ongoing evacuation orders and warnings[2] as communities coped with dangerous threats to home and property. Neighborhoods outside of the direct path of the fires were also subject to curfews and closures.[3] Toxic ash and chemicals fell from the sky, [4] and the County of Los Angeles periodically issued windblown dust and ash advisories.[5]

Much of the affected area is residential, but businesses have also been affected. We expect that in the coming weeks and months some commercial insureds will submit property insurance claims for time element losses stemming from damage to property in the region. A provision likely to be invoked by some claimants is contingent business interruption coverage (CBI).

CBI has been available in the insurance marketplace for years but is still considered a relatively new product with limited case law interpreting the scope of coverage. We last wrote an article about CBI in 2016, and at that time we noted the dearth of case law interpreting common CBI provisions. Nine years later, CBI case law remains limited in the United States.

Anticipating the submission of CBI claims relating to the L.A. fires, we revisit the principles and potential application challenges outlined in our 2016 article. We also consider the impact of California’s COVID-19 case law and the application of the triggering phrase “direct physical loss or damage” to CBI claims (and other coverages triggered by physical damage). We also raise a few additional coverage questions that may arise from these claims. With multiple wording formulations used in the commercial property insurance industry, a continued lack of guiding case law, and the potential for unique damage scenarios, the ultimate outcome of potential CBI claims submitted due to the LA fires is uncertain.

What is CBI?

Typical CBI provisions cover losses resulting from the “necessary interruption” or “necessary suspension” of the insured’s business caused by “direct physical loss of or damage” to property “of the type insured.” Usually, the coverage provision requires that the “property of the type insured” belongs to the insured’s “direct” suppliers or customers, or to “direct” and indirect suppliers or customers (sometimes referred to as “Tier 1” and “Tier 2” suppliers and customers. Coverage is afforded when direct physical loss or damage to the supplier or customer property wholly or partially prevents the supplier from delivering, or the customer from receiving, products or services to the Insured. Notably, policies vary in the manner and degree to which an “indirect” supplier or customer must be in privity with the insured.

In the case of the L.A. fires, and depending on the precise phrasing of the CBI provision, a policyholder seeking CBI coverage will likely need to show that fire caused direct physical loss or damage to the property of one of the insured’s “suppliers” or “customers” and that this damage prevented the supplier or customer from supplying or accepting products or services from or to the insured. The insured must also demonstrate a causal link between that damage and the insured’s “necessary” business suspension. Simple? Not necessarily.

What Constitutes Direct Physical Loss or Damage?

First, consider the “direct physical loss or damage” trigger. During the COVID-19 pandemic many insureds claimed that the virus damaged their property (or third-party property) by adhering to and changing the property’s molecular characteristics. Alternatively, insureds claimed that government orders that directed businesses to close constituted “loss of use” equivalent to loss or damage caused by an external peril.

The Supreme Court of California weighed in on this issue and ruled that “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.” Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106, 1117, 548 P.3d 303, 307 (2024). Regarding COVID-19, even if the virus bonded to or altered property on a microscopic level, this did not cause any injury to the property, which “remained unaffected by the presence of the COVID-19 virus.” Id. at 308. In California, therefore, mere loss of use of property does not satisfy the direct physical loss or damage requirement.

Another Planet acknowledged that “[i]n rare situations, a property may suffer direct physical loss where it is not damaged in a conventional sense, including where a chemical contaminant or noxious odor infiltrates the property and renders it effectively unusable or uninhabitable. In such a case, the contaminant or odor may cause direct physical loss, but only where the source of the property's unusability or uninhabitability is sufficiently connected to the property itself. This situation may arise when the effect of the contaminant or odor is so lasting and persistent that the risk of harm is inextricably linked or connected to the property.” 548 P.3d at 308. However, “[w]hile saturation, ingraining, or infiltration of a substance into the materials of a building or persistent pollution of a premises requiring active remediation efforts is sufficient to constitute ‘direct physical loss of or damage to property,’ evanescent presence is not.” Id. at 323 (quoting Verveine Corp. v. Strathmore Ins. Co., 489 Mass. 534, 184 N.E.3d 1266 (2022)).

An insured claiming damage to supplier or customer property that has burned to the ground will easily establish “direct physical loss or damage” under Another Planet. But what about properties still standing that are intangibly affected by smoke, ash or other fire biproducts? Will California courts distinguish between the COVID-19 scenario and the perils of smoke, ash and the like, for purposes of CBI coverage?

In Oregon Shakespeare Festival Association v. Great American Insurance Co., a federal trial court in the District of Oregon found that the infiltration of wildfire smoke into the interior of a playhouse made it “uninhabitable and unusable” for holding performances, rendering it unusable for its intended purpose. 2016 WL 3267247 (D. Or. June 7, 2016), vacated on stipulated request of the parties, 2017 WL 1034203 (D. Or. Mar. 6, 2017). Subsequently, a California court distinguished the smoke damage in the Oregon Shakespeare Festival case from the claimed COVID-19 “damage” at issue in the case before it. Inns-by-the-Sea v. California Mut. Ins. Co.,71 Cal. App. 5th 688, 286 Cal. Rptr. 3d 576 (2021). The court in Inns-by-the-Sea noted that COVID-19 on the insured’s property was not what rendered the premises uninhabitable or unusable. Rather, the government orders caused the suspension, and all that was needed to return the business to operation was for the orders to be lifted. COVID-19 therefore did not require “restoration efforts similar to those required to abate asbestos or remove poisonous fumes which permeate the property.” 71 Cal. App. 5th at 704.

Under California law, will smoke-related impacts on a property be treated like a virus, or like ammonia gasses or asbestos? The Northern District of California recently suggested that these impacts are more akin to the latter. In Bottega, LLC v. National Surety Corporation, a restaurant group submitted a claim for coverage after its restaurants closed following a declaration of a State of Emergency relating to the 2018 North Bay Fires. 2025 WL 71989, at *1 (N.D. Cal. Jan. 10, 2025). The insurer acknowledged that the fires caused smoke, soot and/or ash damage to the insured locations, but argued that COVID-19 cases “reject the claim that the need to clean the business premises during and after the business closure met the plaintiff’s burden of showing physical loss or damage.” Id. at *4. The court found the insurer’s citations unpersuasive because “the COVID-19 courts distinguished COVID-19—a virus that can be disinfected—from noxious substances and fumes that physically alter property…Whereas a virus is more like dust and debris that can be removed through cleaning…smoke is more like asbestos and gases that physically alter property”—favorably citing Oregon Shakespeare Festival in support of its reasoning. Id. However, the court reserved for trial the factual question of whether the restaurants closed due to the smoke damage as opposed to other factors, such as lack of customers following the fire.

Despite the Bottega court’s statements regarding smoke damage, we expect the question of whether a property has suffered direct physical loss or damage from ash or smoke infiltration stemming from the L.A. fires to be highly fact-driven, with results dependent upon factors including the proximity of the property to the fire, weather considerations, and property-specific analyses for smoke, ash and char particulates to determine whether the presence of substances is “evanescent” or not. See Verveine Corp., 184 N.E.3d at 1276 (“evanescent presence of a harmful airborne substance that will quickly dissipate on its own…does not physically alter or affect property”). In Shirley v. Allstate Insurance Co., 392 F. Supp. 3d 1185 (S.D. Cal. 2019), aff'd, 825 F. App'x 472 (9th Cir. 2020), for example, the court granted summary judgment in favor of an insurer on a claim for smoke damage from wildfires, as none of the experts that examined the insured’s home found evidence of soot, ash or char contamination.

Whether the claimed damage can be cleaned easily may also be relevant. Again, the degree of impact may range widely. However, an insured will not be able to rely on general fire damage in the vicinity to establish coverage; it must tie its business loss to specific damage, not generalized conditions or a customer or supplier’s “loss of use” of their property due to evacuation orders or economic conditions.

Who is a “Supplier”?

Assuming direct physical loss or damage exists, whose property or what property must be damaged to trigger CBI coverage? The answer can be found in the policy wording, which can vary from policy to policy. For example, the wording may simply require direct physical loss or damage “to property of the type insured.” An insured with this language may contend that damage to any physical property anywhere is sufficient to trigger CBI coverage, regardless of whether the property is owned by a direct supplier or customer or an indirect supplier of customer.

Even where CBI provisions contain an express requirement that the damaged property be the property of a supplier or customer, the jurisprudence in this area suggests that what constitutes a “supplier” or “customer” and how close or attenuated those relationships must be to trigger CBI coverage can be an intensely fact-driven analyses. The cases discussed in our prior CBI article are still relevant to this issue. Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534 (S.D. Ill. 1996) and Millennium Inorganic Chemicals Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 744 F.3d 279 (4th Cir. 2014).

Archer-Daniels-Midland (ADM) shows that unless a policy clearly requires a “supplier” to have a direct connection to the insured, a court may not impose this limitation, regardless of whether the parties have a contractual relationship and regardless of the “distance” in links between the two entities. ADM arose out of significant flooding of the Mississippi River that damaged farmland in multiple midwestern states and impacted river transportation. ADM, a farm-product producer, submitted claims for increased transportation and raw material costs which it incurred after barge traffic was halted. The CBI provisions at issue covered loss “caused by damage to or destruction of real or personal property…of any supplier of goods or services which results in the inability of such supplier to supply an insured location[].”

The parties disputed whether the US Coast Guard, responsible for maintaining marine navigation, and the Army Corps of Engineers, responsible for developing flood control systems on U.S. rivers, were “suppliers” of the “service” of transportation on the Mississippi River. The court found they were, finding the phrase “any supplier of goods and services” unambiguous, meaning “an unrestricted group of those who furnish what is needed or desired.” ADM, 936 F. Supp. at 541. The court concluded that improving rivers for navigation is a “service.” The court found it irrelevant that ADM did not have contracts with the Coast Guard or Army Corps of Engineers, since the policy language broadly referred to “any” suppliers. The court also held that farmers that grew the crops were “suppliers of goods and services,” even though ADM bought their grain through intermediary dealers, because the policy language did not limit coverage to “direct suppliers” or “contractual suppliers,” but, again, “any” suppliers.

Millennium Organic demonstrates that even if a policy restricts coverage to “direct” suppliers, the meaning of “direct” can be disputed. In that case, the insured, a titanium oxide processing plant, purchased natural gas to run its operations from a retail gas supplier called Alinta. Alinta bought its supply of gas from various entities that would inject their gas into a natural gas pipeline, at which point Alinta took ownership of the gas. One of the gas suppliers was Apache Corporation. During the policy period an explosion occurred at Apache’s facility, shutting down gas production indefinitely. As a result, Millennium’s gas supply was curtailed and it was forced to shut down for several months. Millennium submitted a CBI claim under language that insured against loss “caused by damage to or destruction of any of the real or personal property…referred to as CONTRIBUTING PROPERTY(IES)…which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium] and results directly in a necessary interruption of [Millennium’s] business.” “Contributing Properties” were defined as a “direct supplier of materials to the Insured’s locations.”

The parties disputed whether Apache was a “direct supplier of materials.” Millennium argued that Apache supplied “materials” while Alinta only provided a service. The insurer asserted that Alinta was a “direct” supplier while Apache was an “indirect” supplier.

The Fourth Circuit found the term “direct” unambiguous, meaning “proceeding from one point to another in time or space without deviation or interruption,” and “transmitted back and forth without an intermediary.” Applying these definitions, the court found that Apache was not a “direct contributing property” because it sold the gas to Alinta. To the court, Alinta was an “intermediary” that interrupted the relationship between Apache and Millennium. A lengthy dissenting opinion argued that “direct” is ambiguous and should have been interpreted in favor of Millennium. Notably, both the majority and the dissent relied on dictionary definitions of “direct” to reach their differing conclusions.

In the context of potential CBI claims stemming from the L.A. area fires, insureds may seek CBI coverage based on attenuated supplier and customer relationships that do not trigger coverage. Both the specific CBI language and the facts of these business relationships will be critical in determining coverage.

What is the “Supply”?

In the absence of policy language that that defines the material(s) “supplied,” courts have generally declined to impose limitations on what it means to supply goods or services to an insured. The cases cited in our prior article on this issue are still instructive. Pentair, Inc. v. Am. Guarantee & Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), Park Electrochemical Corp. v. Cont'l Cas. Co., 2011 WL 703945 (E.D.N.Y. Feb. 18, 2011).

In Pentair, a U.S. company sought CBI coverage after an earthquake struck Taiwan, disabling an electrical substation and preventing a Pentair supplier from manufacturing products for two weeks. Once production resumed, Pentair incurred additional air freight charges to accelerate shipment of the supplier’s products in time for the Christmas season. The CBI coverage extended time element coverage to losses incurred by Pentair as the result of damage to “property of a supplier of goods and/or services to the Insured” caused by a covered peril. The parties disputed whether the electric substation was a supplier of a product.

The Eighth Circuit ruled that the Taiwanese power company “did not supply a product or service ultimately used by Pentair. Thus, it was not a Pentair supplier…because it supplied no goods or services to Pentair, directly or indirectly.” Pentair, 400 F.3d at 615. Thus, even though the power company was a “supplier” and there was no restriction of coverage to “direct” suppliers, there was no coverage because the power company did not supply anything to Pentair. In the court’s view, the situation differed from the farmers in ADM, because their grain was an actual product that reached ADM.

In Park Electrochemical, an insured manufacturer of a technical component called an “N6000” sought CBI coverage after its own Singapore subsidiary that supplied a component of the N6000 product had a factory explosion, destroying the “treater” used to make the component material. The insurer denied the claim in part on the basis that the insured’s subsidiary did not qualify as a “direct supplier” under the CBI coverage.

The Eastern District of New York disagreed, finding the policy ambiguous as to whether a “direct supplier” had to be an entity not controlled by or related to the insurer. The court acknowledged that some cases and treatises specify that the CBI supplier must not be owned, operated or controlled by the insured, but the lack of a definition of “direct supplier” in the policy at issue was problematic. The court noted that policy could have stated plainly that damage had to be to “properties not operated by the Insured,” but it did not contain this phrase. The lesson of Park Electrochemical is that, absent clear limiting language, if the provider of a “supply” is the insured’s own subsidiary, there may be coverage even though this is not the usual intent of CBI coverage.

Since our 2016 article, there have been no significant published opinions further addressing these issues. We expect that courts applying California law that are faced with CBI claims arising out of the L.A. fires will look to these foundational cases for guidance in determining whether a third party is a supplier or customer of an insured and whether the product or service is provided “to” the insured.

We note one unreported Ninth Circuit opinion that might be instructive with respect to the construction of the term “direct supplier,” depending on the parties’ relationship and the insured’s industry. However, the decision’s unreported status makes the Ninth Circuit’s prediction regarding how the California Supreme Court would treat this issue arguably unreliable. DIRECTV v. Factory Mut. Ins. Co., 692 F. App'x 494 (9th Cir. 2017).

In 2011, DIRECTV had contracts to buy “set top boxes” from manufacturers it considered “Tier 1” suppliers. 2:14-cv-08673 Dkt. No. 56 (2/1/16). Many of the set-top boxes included hard drives manufactured by Western Digital, a “Tier 2” supplier. When monsoons damaged Western Digital’s hard drive manufacturing facilities in Northern Thailand, DIRECTV submitted a property insurance claim for contingent business interruption coverage.

The Central District of California ruled that Western Digital’s facility was not a “contingent time element location,” defined as a location of “a direct supplier…to [DIRECTV].” The court found the term “direct supplier” did not encompass Western Digital, where DIRECTV did not have a contract with the company, never paid them, and the hard drives only flowed to DIRECTV through the set-top boxes. The court also found that, without any evidence that the parties intended “direct supplier” to have any technical, or industry-specific meaning, there was no reason to “look beyond the ordinary meaning of the term,” despite DIRECTV’s argument that the term should be “defined according to its usage in the ‘electronics supply chain industry.’” 2:14-cv-08673 Dkt. No. 56 at 6.

On appeal, the Ninth Circuit ruled that a layperson would consider the term “direct supplier” to mean “a supplier that sends its goods or materials straight to the insured without intervening processing,” and that this definition did not include Western Digital. However, the court was persuaded by DIRECTV that it should be able to present extrinsic evidence that “direct supplier” has a particular trade usage and that the insurer had a duty to “inform itself” of the way the term was used by DIRECTV. In reaching this conclusion, the court predicted that the Supreme Court of California would hold that insurance companies have a duty of “informing themselves as to the usages of the particular business insured, and a knowledge of such usage on the part of such company will be presumed.” DIRECTV, 692 F. App'x at 495 (citing Globe & Rutgers Fire Ins. Co. v. Ind. Reduction Co., 62 Ind.App. 528, 113 N.E. 425, 429 (1916)). Thus, what “direct supplier” meant in a “trade usage sense,” and whether Western Digital fell within that definition, were questions of fact for the jury. (The case ultimately settled after remand and before trial.)

These same issues concerning the scope of CBI coverage are likely to surface in any fire-related CBI claims and will likely be determined based on the policy language at issue.

What is a “Necessary Suspension”?

Another question for consideration is whether complete or partial suspension or interruption of business is necessary under a given CBI provision. Like standard business interruption coverage, CBI provisions often contain “necessary suspension” or “interruption” language meant to ensure the physical damage at issue actually caused a suspension of operations of the insured. At least one court has speculated, without deciding, that CBI might theoretically require a lesser degree of suspension than required in the case of a standard business interruption claim arising from direct damage to insured property. Lantheus Med. Imaging, Inc. v. Zurich Am. Ins. Co., 255 F. Supp. 3d 443 (S.D.N.Y. 2015), aff'd, 650 F. App'x 70 (2d Cir. 2016).

In Lantheus, a manufacturer of medical imaging products was forced to cancel production of multiple MRI products due to a 15-month shutdown of the nuclear reactor that supplied it with radioactive isotopes. CBI was provided for time element loss “resulting from the necessary suspension of your business activities…if the suspension is caused by a covered cause of loss to a Contingent Property.” There was no question the reactor was a “contingent property.” But the bigger question was whether a drop in production at the insured location qualified as a “suspension” of business.

The Lantheus court pointed out that CBI and standard business interruption coverage are not the same, noting, “[i]n the context of BI coverage, the circumstances under which a company suffers complete cessation at a given facility, which successfully and uncontroversially triggers a BI loss, are innumerable and easily imagined. The circumstances under which complete cessation at a facility follows from damage to contingent property are less obvious”—suggesting that something less than complete cessation might be appropriate for CBI (although the court noted that in the policy at issue, the BI and CBI sections used the same relevant language, somewhat undermining its analysis). 255 F. Supp. 3d at 456.

Whether the third-party property damage led to a “suspension” of operations can certainly be a disputed issue in a CBI case. In California, the Court of Appeal, Second District has held that “suspension of operations” means total cessation of business activities at an insured’s premises, rather than a slowdown. Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App. 4th 434, 126 Cal. Rptr. 2d 682 (2002). But as Lantheus noted, a particular policy might use wording requiring less than full suspension (“partial suspension” or simply “interruption,” for example). Once again, the specific policy language at issue will be critical.

Conclusion

Given the scope and scale of the devastation in the Los Angeles area and the many industries that call the area home, it is a near certainty that there will be CBI claims arising out of the 2025 fires. The availability of CBI coverage for those claims will depend upon the policy language and the specific facts of each claim. While there is limited jurisprudence interpreting CBI coverages, the existing case law will likely provide guidance to courts grappling with the new issues and circumstances before them. As claims arise, insurance professionals should engage in a full analysis of the policy language in light of existing jurisprudence and undertake a full investigation of the facts of the claimed loss to understand how that language will apply.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.latimes.com/california/live/la-fire-updates-floods-mud-rain-closures-laguna-eaton-palisades

[2] https://lacounty.gov/emergency/

[3] https://pacpark.com/pacific-park-on-the-santa-monica-pier-closed-due-to-pacific-palisades-fire/

[4] https://www.theatlantic.com/health/archive/2025/01/los-angeles-fires-ash-safe-dangerous/681373/

[5]https://content.govdelivery.com/accounts/CALACOUNTY/bulletins/3ce6587?reqfrom=share, https://content.govdelivery.com/accounts/CALACOUNTY/bulletins/3ce6651?reqfrom=share