The conventional wisdom suggests that if your home didn't burn down in a wildfire, you were lucky. Smoke and ash contamination are often seen as cosmetic issues that a good cleaning crew can handle. Insurers who delay testing and remediation claim they're just verifying legitimate losses before paying out. However, this view is flawed and is why Los Angeles County is investigating Farmers Insurance for allegedly stalling on toxin testing and cleanup payments after the 2025 Eaton and Palisades fires. State Farm faces similar scrutiny. The industry has systematically underestimated what smoke damage actually means.
The Reality of Smoke Damage
The idea of "cosmetic damage" falls apart when you test the air and surfaces. Wildfire smoke carries lead, asbestos, chromium, and other carcinogens that settle into drywall, HVAC systems, and upholstery. When county officials met with Eaton fire survivors, they heard from Farmers policyholders who paid for industrial hygienist testing and found unsafe contamination levels in homes that appeared structurally intact. These homeowners couldn't move back in, but their insurers wouldn't authorize remediation or cover ongoing living expenses.
This isn't a coverage gap. Most homeowners' policies include Additional Living Expense provisions that trigger when a covered loss makes the home uninhabitable. The question is whether smoke contamination that renders indoor air unsafe constitutes "direct physical loss or damage" under the policy. Carriers treating this as a gray area are betting that policyholders won't test, won't push back, or won't have the resources to litigate. This bet is now costing them regulatory attention, civil investigations, and reputational damage.
The Evidence Against Insurers
Farmers projected roughly $600 million in losses from the January 2025 fires. Statewide, insurers had paid out more than $23.7 billion on wildfire-related claims as of early March 2026. These figures show the financial stakes are high enough that every carrier has an incentive to define what counts as compensable damage clearly.
The problem is that the lines they're drawing don't match the science. When the California Department of Insurance conducted a Market Conduct Examination of State Farm's handling of these fires, regulators found 398 violations across a sample of just 220 claims, including smoke-damage claims denied without explanation. The county's letter to Farmers alleges similar patterns: delayed authorization for testing, resistance to funding qualified industrial hygienists, and refusal to pay for remediation even when testing confirmed contamination.
This isn't isolated to one carrier. It's a systemic issue stemming from how the industry has historically underwritten and adjusted property claims in wildfire zones. Adjusters are trained to look for visible structural damage. They aren't trained to recognize that a home with intact walls and a functioning roof can still be uninhabitable if the indoor air contains lead particulates at levels that trigger EPA action thresholds.
Steps for Insurers to Take
If you're advising a carrier on wildfire claims, here's what needs to change:
Authorize testing upfront. Don't wait for policyholders to hire their own industrial hygienists and then argue over whether the test was necessary. Build the cost of qualified air quality and surface contamination testing into your initial loss reserve. If the test comes back clean, you've documented that the home is safe to reoccupy. If it doesn't, you've identified the scope of remediation work before the policyholder has spent months in temporary housing.
Define "uninhabitable" with health standards. Your policy language may not spell out what makes a home uninhabitable, but EPA guidelines, OSHA exposure limits, and California Department of Public Health standards do. If testing shows contamination above those thresholds, treat the home as uninhabitable for Additional Living Expense purposes. You can argue about whether the contamination is a covered loss, but you can't argue that the home is safe to occupy.
Train adjusters to recognize non-structural damage. Smoke and ash contamination doesn't show up in drone footage or exterior inspections. It requires sampling and lab analysis. If your adjuster workflow doesn't include a step for air quality testing in homes that survived the flames but sat in the smoke plume, you're setting up your policyholders to discover the problem on their own.
Document your coverage position early. If you believe smoke contamination isn't a covered loss under the policy, say so in writing within the timeframe required by your state's claims-handling regulations. Don't slow-walk the claim by declining to authorize testing. That looks like bad faith and gives regulators and county counsel exactly the pattern they need to build an Unfair Competition Law case.
When Conventional Wisdom Holds
There are legitimate disputes about coverage scope. Not every claim of smoke damage will be valid. Some homes may have pre-existing contamination. Some policyholders may be seeking to upgrade finishes under the guise of remediation. Carriers have a duty to investigate and verify losses.
The problem arises when the investigation itself becomes the obstacle. If you're denying authorization for testing because you don't want to confirm contamination, you're not investigating. You're hoping the problem goes away. In a regulatory environment where two major carriers are now facing civil investigations and potential license actions over their handling of these fires, that strategy is more expensive than just paying for the industrial hygienist in the first place.
AB 1795, the Smoke Damage Recovery Act, would set enforceable, science-based standards for testing and remediating smoke-damaged homes. If it passes, this dispute becomes simpler: either the home meets the standard or it doesn't. Until then, carriers who treat smoke contamination as cosmetic are gambling that regulators won't scrutinize their claims files. Based on what's happening in Los Angeles County right now, that's a bad bet.
