After four years of litigation, key limitations in the California FAIR Plan fire policy were found to be unlawful in Jay Aliff v. California FAIR Plan Association. Originally designed to be California’s insurer of last resort, the California FAIR Plan has increasingly become the default plan for those in California who do not qualify for policies with private insurers.

The decision is significant, not only because of the vast number of individuals who have come to depend on FAIR Plan policies for coverage, but also because so many of these policies have been implicated by the devastating wildfires that engulfed the Los Angeles area in January of this year, especially by those whose properties did not burn but instead were rendered uninhabitable because of smoke, soot and ash. The decision speaks directly to the plight of those policyholders by clarifying that a property insurance policy cannot redefine core property insurance concepts like “direct physical loss” or “smoke damage” in ways that unlawfully restricts coverage.

“Direct Physical Loss” Does Not Mean Permanent Alteration or Destruction

The FAIR Plan redefined “direct physical loss” in 2017 to require “permanent physical changes” to the property. The court found that the FAIR Plan policy unlawfully narrowed coverage by requiring that all physical loss be “permanent.” The court, citing the California Supreme Court’s 2024 decision in Another Planet Entertainment v. Vigilant Insurance Co., 15 Cal.5th 1106 (2024), emphasized that physical loss does not require property damage be permanent—only that the property be demonstrably altered or changed. Another Planet distinguished “persistent” pollution, which constitutes loss, from “evanescent” presence, which does not.

The FAIR Plan, however, requires that damage be “permanent” as a condition for coverage. California Insurance Code § 2071 contains a standard form fire policy and provides that policies in California must be “substantially equivalent to or more favorable to the insured” than the standard form. By adding a “permanence” requirement, the court reasoned, the FAIR Plan unlawfully limited coverage in a stricter manner than the § 2071 standard form, which provides broader coverage for all “loss by fire.”

Smoke Damage Need Not Be Perceptible by Sight or Smell

The court also rejected the FAIR Plan policy’s definition of smoke damage, which required that the damage be “visible to the unaided human eye” or “detected by the unaided human nose of an average person, and not by the subjective senses of [the insured] or by laboratory testing.” The court again acknowledged direction from the California Supreme Court in Another Planet—that the change causing direct physical damage “need not be visible to the naked eye” and that “alterations at the microscopic level may meet this threshold.” Imposing a test requiring sensory perception absent lab testing is both inconsistent with Another Planet and less favorable than the coverage in § 2071’s standard form fire policy. Thus, the FAIR Plan’s smoke damage definition was deemed unlawful.

Key Takeaways

Aliff has several implications for California policyholders:

1. Smoke Damage Claims Should Be Based on Scientific Testing, Not Visibility
   The Superior Court decision affirms laboratory testing as an essential tool for assessing smoke damage claims. In striking the FAIR Plan’s exclusion of laboratory testing as unlawful, the court recognized: “Being unable to resort to their own senses or laboratory tests, it is entirely unclear how an insured could determine whether a particular loss is covered or not.”

   Accordingly, insurers may not reject claims where the claimed damage is imperceptible by smell or sight. Insurers must instead employ accepted testing measures and standards. Testing will show that smoke damage, which leaves behind contaminants that do not disappear on their own and require remediation, is not “evanescent,” thus implicating coverage.

2. Claim-Handling Strategy
   Furthermore, policyholders, public adjusters, and insurance coverage litigators should exercise care in framing smoke claims to focus on demonstrable contamination supported by scientific testing and detailed remediation reports rather than relying on anecdotal evidence.

   The court in Aliff expressed concern about proving contamination in the absence of unaided human perception. Policyholders should thus be prepared to present evidence of damage based on reliable scientific testing methods.

3. Potential for Rising FAIR Plan Costs
   Without requiring visible damage, the decision will no doubt lead to more policyholders requesting scientific testing for smoke damage claims where coverage is contested. Testing costs are expensive, and it can be expected that these costs will be passed on to insureds in the form of rate hikes for FAIR Plan policyholders.

Conclusion

Smoke damage has significant and detrimental impacts on property, ranging from degraded air quality and damaged HVAC systems to contaminated insulation and other materials. Even if the damage is not perceptible to the eye or nose, it can be lasting and remediation, costly. Aliff affirms that policyholders are entitled to comprehensive fire coverage, including for smoke damage that is not permanent or visible, but nonetheless real and remediable. Insurers cannot write out meaningful protection through impermissible policy language. Moving forward, California policyholders faced with smoke damage will be armed with stronger arguments to insist on the bargained for benefits under their policies.