California Enacts First Smoke Damage Insurance Rules

California Governor Gavin Newsom signed four new bills into law on Tuesday, aimed at reforming the state's wildfire insurance sector and providing enhanced consumer protections for wildfire survivors. These legislative actions follow significant consumer fallout from the catastrophic Eaton and Palisades fires that occurred in early 2025. The state's home insurance market has faced a severe crisis, particularly impacting thousands of homes situated in high wildfire risk zones.

Two of the newly enacted bills, AB-1642 and AB-1795, specifically address smoke damage claims, establishing new standards for how insurers must handle these cases. California is positioned to be the first state in the nation to implement such specific regulations for smoke damage. This measure is particularly relevant given that approximately 13,000 of the 40,000 home insurance claims stemming from the Palisades and Altadena fires in January 2025 involved homes damaged by smoke, even if they did not directly burn. The state's Department of Toxic Substances Control is involved in assessing these damages.

In addition to smoke damage, two other bills provide wildfire survivors with increased flexibility regarding mortgage forbearance for homes rendered uninhabitable by wildfires. These reforms are critical in a state increasingly affected by devastating wildfires. In 2024 alone, insurers in California paid out over $22.4 billion in claims. The state is actively investigating two insurers for allegedly systematically delaying and underpaying claims, with one of the insurers, State Farm, characterizing the state's insurance marketplace as "dysfunctional."

Governor Newsom emphasized the importance of these new protections, stating at a press event, "We are continuing to listen, act, and stand alongside the families and communities rebuilding after the Eaton and Palisades fires. These new protections will make insurer obligations clearer and give homeowners more financial flexibility when they need it most." The January 2025 Palisades and Altadena fires resulted in the destruction of 16,000 structures, including 12,000 homes, and caused an estimated $131 billion in property and capital losses. Even former President Donald Trump publicly criticized insurers, including State Farm, for their handling of claims in California.