California Politicians Now Want Oil Companies, Not Insurers, To Subsidize People Living in Wildfire Zones

A proposed state bill would allow individuals and insurers to sue oil companies for wildfires damages.

For decades, California's byzantine insurance regulations effectively forced insurers to subsidize people living in wildfire-prone areas.

With the recent devastating wildfires in Los Angeles exposing the state's already in-crisis property insurance industry to tens of billions in losses, lawmakers are now proposing to shift the cost of that subsidy onto oil companies.

Earlier this week California lawmakers introduced Senate Bill (S.B.) 222, which would allow individuals, private insurers, and the state-run insurance plan to sue oil companies for damages they suffer from "climate disasters and extreme weather events."

"By forcing the fossil fuel companies driving the climate crisis to pay their fair share, we can help stabilize our insurance market and make the victims of climate disasters whole," said California Sen. Scott Wiener (D–San Francisco), one of the bill's authors, in a press release.

Early estimates peg the economic damage of fires at $250 billion. Insurers' losses could be as high as $45 billion.

California's state-administered FAIR Plan, a property insurer of last resort, has just $337 million in reserves and is exposed to an estimated $6 billion in losses from the recent fires.

FAIR will raise that money via a special assessment on private insurers, who can then pass the costs onto individual policyholders. Private insurers are themselves asking for rate increases of as much as 50 percent in response to the fires.

By shifting financial liabilities for the wildfires from insurers and insured onto oil companies, S.B. 222 could spare individual insurance policyholders from what's sure to be a politically unpopular double whammy of a special FAIR assessment and hiked premiums.

The bill is "a twist on preexisting California law that allows insurers to collect from public utilities if there's any nexus between wildfire and utility lines," says Ray Lehman, a senior fellow at the International Center for Law and Economics.

One distinction is that a utility company's downed power line or sparking transformer can be (and has been) a direct cause of a destructive fire.

In contrast, emissions from oil companies (and their customers) are not the direct cause of any wildfires. They are a contributing factor to climate change, which is then a potentially contributing factor to the frequency and severity of wildfires.

States' past efforts to sue oil companies over the effects of climate change, which often rely on creative interpretations of nuisance or security fraud law, have been typically slapped down by courts.

But a tenuous direct link between oil companies' activity and the Los Angeles wildfires won't prevent lawmakers from making them liable for the fires anyway on climate change grounds, says Walter Olson, a legal scholar at the Cato Institute.

"There is something of an open door to states doing dangerous things in terms of assigning liability to nationwide and worldwide production processes," he tells Reason.

Lawmakers also have a lot of freedom to establish the kinds of defenses oil companies could use in response to insurer lawsuits, meaning that they can prevent them from using defenses that would allow them to actually win those lawsuits, says Olson.

Oil companies might be able to argue that California's proposed law is preempted by federal air pollution regulations, or deploy defenses that limit the amount of wildfire damages they are responsible for.

But, ultimately, if California wants to pass a law that allows insurance companies to sue oil companies for wildfire damages and easily win those lawsuits, there's no "slam dunk" constitutional argument against it, says Olson.

An irony of S.B. 222 allowing insurance companies to sue oil companies over losses from "climate disasters" is that, up until very recently, insurers themselves were forbidden from factoring climate risks into their premiums.

For decades, California regulations said that insurers could only cite averaged past losses from wildfires to justify premium increases.

That effectively forbade them from using forward-looking catastrophe models that factor in the increasing severity and frequency of wildfires caused by climate change. Proposition 103 also forbids insurers from passing on the rising costs of reinsurance (which does factor in the increased risks of climate change) to customers.

These regulations combined to keep California's insurance rates well below market rates, which in turn created a crisis of insurers not renewing policies and not issuing new ones.

To forestall a total collapse of the property insurance market, Ricardo Lara, California's insurance commissioner, issued emergency regulations in December 2024 that at last allowed insurers to use catastrophe models in setting premiums and pass on reinsurance costs to customers.

Those reforms came a little too late to shore insurance company finances before the Los Angeles fires that broke out just a week later. They also were likely to be hit with legal challenges from consumer advocates.

The president of Consumer Watchdog, the group that was the driving force behind the ballot initiative that created California's insurance regulatory regime, called Lara's reforms "the worst type of power grab" in comments to the Los Angeles Times.

Consumer Watchdog is now one of the leading groups supporting S.B. 222.

Making oil companies liable for wildfire damages would certainly save both the insured and the insurer a lot of money.

Olson suggests the law could even lead to lower insurance premiums in California, as insurance companies cut rates to attract customers, safe in the knowledge that any wildfire losses they suffer could be recouped by suing oil companies in sure-to-win lawsuits.

While S.B. 222 would shore up the finances of insurance companies on the backs of oil companies, it would nevertheless undermine the purpose of insurance. Insurance premiums relay important information to homeowners about the risks of building in wildfire-prone areas and the safety benefits of fire-safe building practices.

That useful function is of increased importance in a world where climate change is making the dangers posed by wildfires to people and property more severe.

By shifting liability onto oil companies, S.B. 222 would leave consumers bereft of better information about the risks of climate change-enhanced natural disasters.

The bill would create a strange situation in which oil companies would be effectively subsidizing people to put themselves and their property at more risk of climate-related disasters.