Although there are still 9 active wildfires in California’s wine country, Cal-Fire anticipates that nearly all of these will be fully contained by the end of this week.  Even as the fires continue, the region’s vineyards, wineries, and related businesses are starting to file their insurance claims.  To date, no cause(s) of the fires has been determined.

Burned properties will need to rebuild anticipating increased construction costs, which is typical after a disaster of this magnitude as many people are simultaneously competing for a limited number of supplies.

Many, but not all, of the region’s vineyards are fortunately located on the valley floor and have so far avoided the actual fires which concentrated on the surrounding forested hillsides.  Nevertheless they have been affected by those fires in many ways and insurers should should be alert to coverage issues unique to the wine industry.

Damaged Crops

Although the vast majority of the season’s grape crop had already been harvested, many of the coveted reds were still on the vine because they require additional time to mature.  However, since the fires first broke out in early October, the region has been contending with clouds of smoke that decrease air quality and damage crops by penetrating the grape skins.  Also, many vineyards were left without water for several days in the intense heat, resulting in many acres raisened on the vine.

In order to avoid going through the process of harvesting and processing potentially smoke damaged grapes only to learn down the road that their taste was ruined, vineyards should contact laboratories to test their crops for smoke damage, thus mitigating their damages so that vineyards are not throwing good money after bad grapes.  Vineyards should prepare to provide  insurers with information relating to their crop size, quality, maintenance and harvest costs, and expected crop price, all of which varies from year to year.

In addition to grapes currently on the vine, there will also be questions regarding whether the vines suffered smoke damage that will taint future crops and whether the wine currently being produced was affected.  Even a small amount of smoke can negatively impact a wine’s flavor signature, ruining an entire stock.  In addition, the loss of power at many wineries for several days led to an inability to control the temperature of the wine in fermenters.

This intersection is where the arts of wine pricing and insurance adjusting meet, challenging both insurers and insureds.  How much to value a ruined wine stock that could have been two or three years away from being bottled will be a point of contention, as assigning a dollar value to wines early in the fermenting process is less exact than wines further along in the production process.  Accordingly, the special nature of the wine market, as opposed to other crops, will make the adjustment process here especially complex.

Business Interruption Damages

This series of wildfires has been the most destructive and deadliest in California’s history, killing 42 people and destroying 8,400 structures.  Due to the magnitude of the wildfires, much of the region has been either unable to operate or operating on a limited basis.  For those vineyards and wineries that have business interruption coverage, carriers can expect to receive claims for the inability to carry out harvesting, shipping, production, tastings, and special events (such as weddings) due to the fires.

In order to calculate business interruption losses, adjusters will need to analyze the historical financial data, business records, and forecasts for the specific location and the region generally to determine the financial impact the wildfires had on a particular business.  For the vineyards that are burned and need to be replanted, it will take many of them several years to get fully operational, since at least three years is required for the vines to mature and produce viable fruit.

As part of their business interruption losses, insureds may be filing claims for reputational damage due to the wildfires.  To show such damages, they will need to produce evidence showing a decrease in profits that can be attributed to perceptions derived from the fires and not explainable by market conditions.

In addition, the region’s wine industry is an interconnected web of growers, producers, pickers, and distributors.  An interruption in one part of the industry will have ripple effects that impact the entire chain of production.  Accordingly there may be contingent business interruption losses depending on whether wineries and vineyards can find other business partners to replace those damaged by the fires and no longer able to meet their growing or production obligations.  Thus, even though many of the vineyards were not severely damaged by the fires, they may nonetheless incur damages upon finding there are not enough production facilities left standing in the region to ferment and press their grapes.

These wildfires are a major event for the insurance industry, and taps two skill sets insurance lawyers are known for: our abilities at analyzing coverage issues as well as our expertise in selecting wines.  So in the coming months, when you are about to order your next bottle of cabernet, NOT SO FAST.  There is likely to be a shortage of good California reds.