California Passes Nation’s First Insurance Requirements for Smoke Damage Claims

California Gov. Gavin Newsom signed into law a spate of bills to reform the state's wildfire insurance sector, after consumer fallout from the catastrophic Eaton and Palisades fires of early 2025.

The four bills signed in Sacramento on Tuesday are aimed at adding consumer protections for wildfire survivors. The state's home insurance crisis is especially acute as thousands of homes are at high wildfire risk.

Two of the bills aim to codify protections and remediation for smoke damage, and two more give wildfire survivors more leeway to seek mortgage forbearance on homes that are rendered uninhabitable by wildfires.

Increasingly damaging wildfires have resulted in a fraught situation for California, where insurers paid over $22.4 billion in claims in 2024. The state is investigating two insurers, alleging they systematically delayed and underpaid claims. One of theme, State Farm, has called the state's insurance marketplace "dysfunctional."

"We are continuing to listen, act, and stand alongside the families and communities rebuilding after the Eaton and Palisades fires," Newsom said at a press event. "These new protections will make insurer obligations clearer and give homeowners more financial flexibility when they need it most."

The Palisades and Altadena fires in January 2025 destroyed 16,000 structures, including 12,000 homes, causing upward of $131 billion in property and capital losses.

Even President Donald Trump was critical of the insurers, singling out State Farm and others and calling them "horrendous" for allegedly not paying out to Californians who'd spent years paying premiums.

Mortgage and insurance reforms

Two of the bills, AB-1642 and AB-1795, create standards for smoke damage claims. California could be the first in the nation with this kind of standard, the governor said. Some 13,000 of the 40,000 home insurance claims from the Palisades and Altadena fires involved smoke-damaged homes that didn't burn.

California's Department of Toxic Substances Control and the California Air Resources Board will also develop standards for the testing and remediation of lead and asbestos contamination from wildfires. Insurers would need to pay for cleanup.

“AB-1642 will set a new national precedent on scientific standards for clearing a home for occupancy after a wildfire," Assemblymember John Harabedian (D-Pasadena) said in a statement. "Science, not an insurance company’s opinions, will determine whether a home is safe."

Two other bills, AB-1842 and AB-1847, address mortgage forbearance. The first would let homeowners in a federally declared disaster zone request a 12-month forbearance on a residential mortgage loan. That would enshrine a protection homeowners got after the wildfires. The second doubles the mortgage forbearance window available by law for L.A. fire survivors for up to two years.

The Golden State has three more pending bills that offer further insurance reforms. The Legislature passed them all last week and sent them to Newsom's desk.

SB-876 would add new requirements for insurers to handle claims more quickly in a declared emergency. It would also increase penalties for violations of fair claims practices. SB-877 is aimed at speeding the times for insurers to provide documents related to claims. SB-878 requires those insurers to provide compliance data on their payouts, starting in 2028.

The measures come as California Insurance Commissioner Ricardo Lara reviewed over 2,000 complaints from homeowners about delays and denials in insurance payouts.

Critics call for further reforms

A Los Angeles Times investigation last year found that just 38% of the 22,500 homes destroyed in California's 2017–20 wildfire seasons have been rebuilt. A number of factors, like permitting and the property's geography, play a role. Wildfires cause a sudden widespread need for contractors, increasing costs.

But insurance payouts make the difference between fast rebuilds and those that linger.

At the U.S. Chamber of Commerce's housing summit this week, Viji Rangaswami, head of government affairs for Liberty Mutual Insurance, blamed insurance premium increases on construction inflation, including materials and labor costs, and time to get permitting and licensing done.

"That's where [we] see, over the last five years, the most pressure in terms of setting the premiums; it's on the expected severity of loss," Rangaswami said. While she acknowledged catastrophes are growing more severe, "the largest driver in terms of severity of loss has been inflation. And in particular, construction inflation."

But the state also needs to create mandates for insurers, said Joy Chen, a former L.A. deputy mayor who's executive director of a group of wildfire survivors who have organized a group called the Eaton Fire Survivors Network. The group backed several of the bills, plus another that would add requirements for insurers when they don't renew a homeowner's policy.

"We're in a very, very bad position," Chen said. About 70% of the wildfire survivors report delays, denials, and underpayments that are slowing their recovery, the group found.

They pushed to turn back a legislative effort to limit the liability utilities face for wildfire damage caused by their equipment. The also filed to intervene in the state's investigation of State Farm. Now, Chen told Realtor.com the group is collecting data on insurance payouts.

"We are looking to really hold insurance companies accountable," Chen said. "In a time of rising disasters, we want people to be able to recover."