Wildfires have become an increasingly significant risk for businesses, and the recent devastation in Los Angeles highlighted the widespread disruption they can cause. Though wildfires are often associated with North America and Australia, several countries in Asia are also subject to wildfire risks — due to rising temperatures, deforestation and land-use changes — and resulting business interruption (BI) losses.
Impact of California wildfires spreads as far as Asia
According to Insurance Business magazine, the LA wildfires had financial implications for Asian insurers and reinsurers. For instance, South Korean insurers are anticipating losses around KRW90 billion due to their policy coverage in affected areas of California. DB Insurance had potential claims in the region of KRW 50-60 billion. Meanwhile, Korean Re was projecting smaller losses, estimated between KRW 15-30 billion. Despite these figures, both companies have stated that these losses are manageable and within their capacity.
Whilst analysts have suggested the overall impact on insurers’ credit ratings would be minimal due to strong reinsurance arrangements and diversified portfolios, the growing frequency and severity of extreme weather events could drive up future reinsurance costs. This highlights the increasing importance of wildfire risk management in the Asia-Pacific region — both for local businesses facing direct threats and insurers with international exposures.
Rise of wildfires in Asia
In Asia, wildfires are often driven by a combination of natural factors and human activities, with agricultural practices playing a significant role. Each dry season, farmers across Southeast Asia engage work to clear forests and remove old crops in preparation for new planting. This method is a cost-effective way to replenish soil nutrients, but it frequently leads to uncontrolled fires that spread beyond the intended areas and cause widespread damage.
These fires are not just a local issue. They often generate thick smoke and haze that cross national borders, affecting air quality in neighbouring countries. Indonesia’s forest and peatland fires, for example, have led to a severe haze crisis impacting Malaysia and Singapore and resulting in school closures, flight cancellations and health concerns. Similar cross-border pollution has been observed between Myanmar and Thailand, as well as northern Vietnam and Laos.
Wildfires represent a growing challenge for both insurers and businesses. As wildfire risks escalate in Asia, businesses operating in high-risk areas are increasingly recognising the need for innovative insurance solutions, improved fire policies and stronger regional cooperation to more effectively manage cross-border smoke pollution.
Challenges in BI coverage and wildfire claims
The key complexities of BI claims related to wildfires include policy interpretation issues, supply chain disruptions and evolving litigation trends.
1. Proving physical loss or damage
BI insurance traditionally requires direct physical loss or damage to trigger coverage. A wildfire directly burning a business’s property is a clear case, but disputes arise over smoke damage, soot infiltration and hazardous air quality, including haze.
- Structural damage: If a wildfire directly damages a building, BI coverage is likely triggered.
- Smoke/environmental contamination: Damage may not be immediately visible, so in these instances insurers assess whether factors such as embedded soot or degraded air quality constitute a tangible alteration of the property.
- Legal precedents: In connection with COVID, courts ruled that virus contamination did not constitute physical damage. However, wildfire smoke has historically been accepted as a cause of property loss (as prolonged smoke exposure can lead to lasting damages that go beyond what routine cleaning might remedy) — making this an area of legal dispute.
2. Civil authority coverage: proximity and causal links
Coverage under civil authority provisions further illustrate the nuances of BI policies. These provisions are intended to help businesses when government-mandated closures or evacuation orders limit access to their premises. Determining coverage under this clause typically involves examining the geographic proximity of the damage and the specific reasons behind the order. In such scenarios, insurers and policyholders work together to review evidence of nearby damage and related factors to clarify whether the policy’s terms are met.
- Proximity requirements: Most policies require that the fire cause physical damage within a specified distance (e.g., 1-5 miles). If an evacuation order is issued but the fire remains outside this radius, this will likely not be covered by the policy.
- Causal link between damage and order: Need to establish whether the evacuation order was preventive rather than due to confirmed property damage. Some policies require that the order be issued directly because of property damage rather than a general safety precaution.
- Coverage limits: Civil authority coverage often has a 72-hour waiting period before it kicks in and is typically capped at 2-4 weeks or could be subject to a policy sub-limit.
3. Contingent business interruption (CBI): supply chain disruptions
CBI coverage addresses losses incurred when key suppliers or partners are affected by a wildfire. Commonly referred to as suppliers’ extension clauses, this protection is particularly relevant when a supplier’s disruption directly impacts a business’s ability to operate. The effectiveness of CBI coverage depends largely on the precise language in the policy. Several complications arise in wildfire-related CBI claims:
- Named vs. unnamed suppliers: Many policies require that affected suppliers be explicitly named. If a critical supplier is not named in the policy, the loss may not be covered.
- Proving causal chain of loss: Businesses must prove their revenue loss was directly caused by the supplier’s wildfire damage, not general market conditions.
- Limitations on coverage for secondary suppliers: If a supplier’s supplier is impacted, the business may not be covered unless the policy explicitly allows multi-tier coverage.
4. Power outages
Wildfires often damage electrical grids, leading to power outages that force businesses to close. Some BI policies provide loss of utilities coverage, but with strict limitations:
- Requirement for direct physical damage: Many BI policies only cover outages if the fire physically damages utility infrastructure (e.g., transmission station).
- Exclusion for preventative shutdowns: In Los Angeles and other regions, utilities conduct public safety power shutoffs (PSPS) to prevent wildfires. If an outage is caused by preventive measures rather than fire damage, this will likely not be covered.
- Waiting periods: BI coverage for power outages typically does not apply until 24-72 hours after the outage begins.
5. Concurrent causation
Wildfire-related claims often involve multiple contributing factors (e.g., fire, smoke, power outages, flooding from firefighting efforts), which complicates coverage. Insurers must assess whether the dominant cause of loss is covered, whether any anti-concurrent causation (ACC) clauses apply, and how courts interpret concurrent causation in BI claims.
In the UK, insurance policies typically follow the principle of proximate cause — meaning that if a covered peril is the primary cause of loss, the policy should respond. However, if an excluded peril (unrelated to the fire damage) is the dominant cause, insurers may deny the claim.
The Financial Conduct Authority (FCA) test case on COVID BI claims reinforced that if multiple concurrent causes contribute to a loss, insurers must analyse whether any covered peril played a material role. Although this was focused on pandemic-related losses, its principles may influence wildfire-related claims, especially concerning evacuation orders and smoke damage.
ACC clauses, more common in the U.S., override this by stating that if an excluded event contributes in any way, the claim is denied entirely. For example, if a wildfire burns a business but firefighting efforts cause flooding that worsens the damage, the claim may be denied based on flood exclusions. Another example: If looting or vandalism occurs after an evacuation, BI claims may be denied under riot and theft exclusions.
COVID BI litigation in the UK has clarified that, in the absence of explicit ACC clauses, courts may apply a concurrent causation analysis, potentially broadening coverage for policyholders.
What’s next?
As wildfire events increase globally, concurrent causation in BI claims will continue to be a key issue — shaping future litigation, policy wording and risk management strategies. The experiences and legal discussions emerging from COVID-related BI claims have also contributed to a broader understanding of what constitutes physical damage and how best to evaluate complex losses.
With wildfires and haze pollution posing economic challenges in Asia, insurers and policyholders could consider more tailored solutions, such as parametric insurance models that trigger payouts based on pollution index levels. Governments and regulatory bodies may start introducing stricter policies on agricultural burning and urban emissions to mitigate future economic loses tied to BI risks.
By maintaining open communication and a proactive approach to risk management, businesses can better navigate the claims process while ensuring that coverage supports their recovery efforts.
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Tags: Asia, BI, Business interruption, business interruption (BI) insurance, Fire, Fire damage, Fire prevention, fires, natural disasters, Property, Property damage, wildfires