Overview
In 2025, the California legislature tasked the California Earthquake Authority (CEA), as administrator of the state’s Wildfire Fund, to prepare the Senate Bill 254 (2025) Study Report, considering 10 recommendations that the state legislature and Governor Newsom agreed should be studied to help California become more resilient to natural catastrophes:
- Enhance access to and affordability of property insurance
- Evaluate options to socialize the financial risk of natural catastrophes
- Consider mitigation measures and technology solutions to reduce the incidence of wildfires and retard their spread
- Develop ways to speed compensation to victims of wildfires and speed recovery
- Protect utility ratepayers by helping utilities improve safety and reduce wildfire risk
- Streamline and lower the costs of compensating those injured by wildfires
- Consider ways and means to limit the cost of claims for wildfire damage, including possible damage limitations (e.g., establishing per-event aggregate limits, limiting public entity damage awards, capping attorneys’ fees, and limiting the ability of property owners outside wildfire perimeters to recover damages)
- Related to number 3 above, lower the risk of wildfires spreading by implementing property-specific and community-wide hardening and similar measures
- Close insurance gaps with minimum insurance requirements, match insurance rate reductions/discounts with mitigation measures, and improve emergency responses and land use planning
- Consider new models and structures to replace or complement the state’s Wildfire Fund
The authors make the case for an “all-of-government, all-of-society” effort to solve interconnected problems and achieve the following goals:
- Supplying Californian ratepayers with affordable, reliable, clean, and safe electric energy
- Providing California property owners with affordable, competitive, fairly regulated property insurance
- Ensuring safe and resilient communities
The report acknowledges that climate change is “systematically” pressuring – and will continue to pressure – efforts to achieve these goals.
In Depth
Resilience under pressure: The case for immediate action
The report begins by summarizing current conditions and challenges, as well as California’s recent response to its history of devastating wildfires, culminating with the creation of the Wildfire Fund, which focuses on wildfires attributable to electric utilities. The report is frank in acknowledging that the status quo is not working – utilities are “unstable and at risk,” while the willingness of insurers to cover property in wildfire-prone locations (which now includes much of the state) is “limited and fragile.”
The report includes an in-depth review of the current state of California’s electric utility sector, stressing the critical importance to the state’s economy and environment – and to ratepayers – of utilities’ access to credit markets. It is in no one’s interest to have financially distressed utilities, whether publicly or privately owned, supplying electric power to Californians. The report highlights the considerable risk-mitigation improvements made by electric utilities in recent years but also notes the limits of those efforts. Utilities can do little to reverse decades of development in the wildland urban interface (WUI), the buildup of wildfire fuels in those areas, and the uneven, limited property-specific and community-wide hardening and risk reduction.
The report also describes the current state of the insurance sector as the “financial first responder” to wildfires. A large percentage of California homeowners are underinsured. Some have no wildfire coverage, but this “insurance gap” is not as pronounced as gaps for flood and earthquake coverage. Take-up rates for coverage against the latter two perils are quite low. Accordingly, the report concludes that solving for all three perils at this time is likely not financially feasible.
The report notes the recent increase in properties insured by the California FAIR Plan, particularly in wildfire-prone regions, amounting to roughly 10% of the state’s residential structures. The FAIR Plan is now the only (or the primary) available insurance market in the most exposed locations, rather than functioning as a last resort as originally designed. But when the plan exhausts its assets, California’s state-licensed insurers – all of which participate in the plan – bear allocated shares of liability. When FAIR Plan losses increase, insurers can surcharge policies. They can also subrogate against utilities when losses are attributable to utility equipment or operations. Utilities can then claim against the Wildfire Fund as losses increase – hence, the interconnectedness of “the system” for compensating wildfire losses.
An interconnected system under compounding strain
Putting together the state’s property insurance market conditions with the current electric utility financial system and the existing “fragmented and undersized” wildfire risk mitigation picture, the report asserts that the time for incremental adjustments has passed. As the report addresses at some length, inaction has both “large near-term and severe long-term adverse consequences” for California’s communities, insurers, electric utilities, and electric power ratepayers.
Pathways to resilience: Strategies and options
The Report uses “no action” as a baseline against which to measure three policy pathways:
- Reducing community risk
- Equitably allocating the costs of catastrophes
- Improving resiliency
Within each pathway, the report examines cost-benefit tradeoffs and presents strategies and options. The authors acknowledge considerable timing differences across the pathways in terms of execution, but the aim of the report is to set out “actionable, viable, and durable” steps for the California legislature and the governor to consider to help the state increase resiliency.
Key takeaways: Policy tradeoffs and near-term decisions
The first pathway includes a variety of community-wide, coordinated strategies and options to incentivize and facilitate reductions in wildfire risk, producing beneficial results but not in the near term (i.e., the next one to two years). Rather, the report acknowledges that results from this pathway can be expected over years and decades.
The second pathway proposes options with shorter execution timelines, including enacting legislation to reform the FAIR Plan (restoring it to its original purpose as a last-resort property insurer, changing legal liability standards for utilities, and establishing a more durable Wildfire Fund. The option limiting damages recoverable by property owners outside wildfire perimeters is one example of the tradeoffs that legislators will need to consider in light of considerable ongoing controversy about handling smoke damage and remediation of toxic substances produced by urban fires and distributed to properties still otherwise intact after the Palisades and Eaton fires of 2025 (see AB 1795, the Smoke Damage Recovery Act, now moving through the California legislature). “Solving” the state’s underinsurance problem seems even more complex – likely requiring both legislation and regulatory action, as well as robust educational efforts to improve (and reinforce) knowledge levels of insurance company staff, insurance intermediaries, and insureds. Then there is the question of whether household incomes of California property owners, particularly in the highest-risk locations around the state, will be able to sustain payments of risk-adjusted, market premiums for wildfire coverage that is sufficient to rebuild structures to pre-fire status.
The third pathway also includes options that are potentially actionable in the near term (i.e., the next year or two) but that will entail substantial financial commitments from the state. These options include variations on the theme of state financial support for financing wildfire losses – ranging from a new wildfire liability insurance program for utilities to a state-run/state-financed wildfire insurer.
The report stops short of endorsing any of the pathways, strategies, and options it includes. Now the hard work begins – in an election year – for the legislature and the governor’s office to synthesize the possibilities into one or more legislative/regulatory packages.
If you have questions about the Senate Bill 254 (2025) Study Report and California’s efforts to become more resilient to natural catastrophes, please contact your regular McDermott Will & Schulte lawyer or the author of this alert.