Climate Change and Commercial Property Insurance: What’s Already Happening to Your Coverage

This is not a theoretical article about what might happen to commercial property insurance someday. It is about what is already happening — right now, to California businesses, in claims that are being filed, disputed, and litigated today. The climate has changed faster than insurance policy language, and the gap between what businesses expect their coverage to do and what carriers are willing to pay is growing wider every year.

Atmospheric rivers are flooding businesses in areas that were never considered flood zones. Extreme heat is destroying temperature-sensitive inventory in warehouses that never needed climate control. Wildfire smoke is infiltrating HVAC systems in commercial buildings 50 miles from the fire line. Post-wildfire debris flows are burying commercial properties under mud and rock that insurers call “earth movement” and refuse to cover. And behind all of it, carriers are leaving California entirely, non-renewing commercial policies by the thousands, and pricing the businesses that remain out of affordable coverage.

Atmospheric Rivers and the Flood Exclusion Gap

California’s commercial property policies universally exclude flood. The standard ISO CP 10 30 (Causes of Loss — Special Form) excludes “flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind.” This exclusion was written when flood was relatively predictable — rivers had floodplains, FEMA had maps, and businesses in low-risk zones could reasonably conclude they did not need flood coverage.

Atmospheric rivers have changed the calculus entirely. These massive corridors of moisture produce rainfall amounts that overwhelm drainage systems, create flash flooding in areas with no history of flooding, and turn dry creeks into raging torrents. The January and February 2024 atmospheric river events flooded commercial properties across Southern California that had never seen water intrusion in decades of operation. The businesses had no flood insurance because they were not in FEMA flood zones. Their commercial property policies excluded flood. They were left with nothing.

The coverage fight centers on the distinction between “flood” and “rain.” Rain entering through the roof or walls is typically a covered peril under commercial property policies. Water that accumulates on the ground and enters the building from below is “flood” and excluded. But atmospheric river events often involve both: water coming through the roof and water rising from the ground simultaneously. The carrier will attempt to attribute as much damage as possible to flood, while the policyholder should argue that the concurrent rain intrusion is independently covered. For more on the flood exclusion in commercial policies, see our article on the commercial flood exclusion.

Extreme Heat Events and Spoilage/Inventory Losses

Extended heat waves are destroying commercial inventory in ways that existing policies were not designed to address. Warehouses without climate control — which never needed it before — are reaching internal temperatures that melt products, spoil food inventory, degrade pharmaceuticals, warp plastics, and destroy adhesives and chemicals. Outdoor storage yards are seeing heat damage to materials that were always stored outdoors without incident.

The coverage questions are significant:

• Is heat damage a covered cause of loss?The Special Form covers “risks of direct physical loss” unless specifically excluded. Extreme heat is not specifically excluded. But carriers argue that gradual temperature effects are not “direct physical loss” — that the damage is the result of environmental conditions, not a sudden event. Policyholders should counter that a heat dome reaching 120°F is as much a covered peril as a cold snap freezing pipes.
• Does the spoilage coverage endorsement respond?Many commercial policies include a spoilage coverage endorsement (ISO CP 04 40 or similar) that covers loss of perishable stock due to “a change in temperature or humidity resulting from” mechanical breakdown, contamination, or power outage. The key question is whether the heat event itself triggers coverage, or whether it only triggers coverage when it causes a secondary mechanical failure (e.g., an overwhelmed HVAC unit). For a deep dive, see our article on spoilage coverage.
• Business interruption for heat closures.When extreme heat forces a business to close (either because the building is uninhabitable or because local authorities issue closure orders), the business interruption coverage should respond — but only if the closure results from “direct physical loss of or damage to” the covered property. The carrier will argue that being too hot to operate is not “physical damage.” The policyholder should argue that a building rendered uninhabitable by heat has suffered a loss of use that constitutes physical loss.

Wildfire Smoke Infiltration Miles from the Fire Line

Wildfire smoke is an insidious peril. A commercial property can be 30, 50, or even 100 miles from the nearest fire and still suffer significant smoke damage. Smoke particles infiltrate HVAC systems, contaminate inventory, permeate soft goods and fabrics, corrode electronics, and create indoor air quality conditions that make buildings uninhabitable. For restaurants, food processors, medical facilities, and clean-room operations, even modest smoke contamination can shut down operations.

The coverage landscape for smoke damage is surprisingly favorable to policyholders — if you know how to present the claim:

• Smoke is a covered peril.The standard commercial property Special Form does not exclude smoke. Fire and its byproducts (including smoke) are covered causes of loss. The carrier cannot invoke the fire exclusion (there is none) and the pollution exclusion generally does not apply to smoke from a hostile fire. California courts have been clear that smoke from a wildfire is not “pollution” within the meaning of the standard pollution exclusion. For more on smoke damage claims, see our article on smoke damage coverage.
• The distance from the fire does not matter. The policy covers smoke damage, not fire damage. The smoke does not need to come from a fire on or adjacent to your property. If wildfire smoke traveled 50 miles and damaged your inventory, the loss is covered just as it would be if the fire were next door.
• Business interruption for smoke-related closure.If smoke contamination renders your commercial property unusable — either because the air quality is dangerous or because the contamination requires professional remediation — the business interruption coverage should respond. The period of restoration begins when the smoke damage occurs and ends when the property is restored to usable condition.
• Civil authority coverage for evacuation zones. When authorities issue evacuation orders or air quality advisories that prevent access to your commercial property, the civil authority additional coverage in your policy may provide business income and extra expense coverage, even if your property itself was not damaged.

Post-Wildfire Flood and Debris Flow: The Exclusion Battle

One of the most devastating — and most contentious — climate-related perils is the debris flow that follows a wildfire. When fire denudes hillsides of vegetation, the subsequent rain events produce catastrophic mudflows and debris flows that can bury commercial properties under feet of mud, rock, and debris. The 2018 Montecito debris flow, following the Thomas Fire, killed 23 people and destroyed or damaged hundreds of structures. Similar events following subsequent fires have affected commercial properties throughout fire-prone Southern California.

The coverage battle is predictable: carriers invoke both the flood exclusion and the earth movement exclusion. Policyholders argue that the debris flow is a direct consequence of a covered peril (fire) and should be covered as ensuing loss. For an in-depth analysis, see our article on wildfire and mudslide coverage and our article on earth movement and landslide exclusions.

The legal arguments that favor the policyholder:

• Efficient proximate cause.Under California’s efficient proximate cause doctrine, when a covered peril (fire) sets in motion a chain of events that includes an excluded peril (earth movement or flood), and the covered peril is the “efficient proximate cause” of the loss, the entire loss is covered. The argument: but for the wildfire denuding the hillside, the debris flow would not have occurred. Fire is the efficient proximate cause.
• Ensuing loss provisions.Many commercial property policies contain an ensuing loss clause that states excluded perils (like earth movement) do not exclude coverage for “any resulting loss” from a covered peril. If fire is covered, and the debris flow is a “resulting loss” from the fire, coverage applies.
• Anti-concurrent causation clause limitations.Carriers rely on anti-concurrent causation clauses to argue that any involvement of an excluded peril bars coverage. California courts have been skeptical of these clauses when applied to defeat the efficient proximate cause doctrine — a judicially created rule that predates and may override the contractual clause.

PSPS Events and Business Interruption

Public Safety Power Shutoff (PSPS) events — where utilities deliberately cut power to prevent wildfires during high-wind conditions — have become a recurring reality for California businesses. A PSPS event can last hours or days, and for businesses that depend on continuous power (restaurants, cold storage, manufacturing, data centers, medical facilities), the losses are immediate and significant.

The coverage questions for PSPS events:

• Off-premises utility services coverage.Most commercial property policies include coverage for loss caused by interruption of utility services from an off-premises source. The standard ISO Off-Premises Services — Time Element endorsement (CP 15 45) covers business income loss when utility service is interrupted by a covered cause of loss at the utility’s facility. A PSPS event is a deliberate shutoff, not a physical loss at the utility. The carrier will argue this is not covered. For details, see our article on off-premises utility services coverage.
• Spoilage during power shutoffs.When a PSPS event causes refrigeration failure, the spoilage endorsement should respond — but only if the endorsement covers power outage as a triggering event. Many spoilage endorsements are limited to mechanical breakdown of the refrigeration unit itself, not external power loss. Review the endorsement language carefully.
• Extra expense to maintain operations.Businesses that rent generators, relocate inventory, or take other measures to maintain operations during a PSPS event should look to the extra expense coverage in their policy. These costs are incurred to “avoid or minimize the suspension of business” and are typically covered if the underlying cause qualifies.

The Insurance Availability Crisis

Behind every coverage dispute is a more fundamental problem: the growing inability of California businesses to obtain commercial property insurance at all. Carriers are leaving the state, non-renewing policies in wildfire-prone areas, and pricing premiums at levels that make coverage unaffordable for small and mid-sized businesses.

The dynamics:

• Carrier departures. Multiple major carriers have reduced their California commercial property portfolios or stopped writing new business entirely. The surplus lines (non-admitted) market is filling some gaps, but at significantly higher premiums and with fewer regulatory protections. For broader context, see our article on the California insurance crisis.
• Catastrophe modeling changes. Carriers have shifted from using historical loss data to forward-looking catastrophe models that incorporate climate projections. These models predict higher and more frequent losses, which drives premium increases, coverage restrictions, and non-renewals. The models are proprietary, their assumptions are opaque, and policyholders have no ability to challenge the inputs.
• Reinsurance cost pass-through.Global reinsurers have sharply increased the cost of catastrophe reinsurance for California-exposed portfolios. Primary carriers pass these costs directly to policyholders through premium increases and higher deductibles (including percentage-based deductibles for wildfire and earthquake, which can be 5–10% of the insured value).
• Coverage restriction. Even when policies are available, the terms are shrinking. Sub-limits for wildfire, higher wind/hail deductibles, expanded exclusions for water damage, and elimination of guaranteed replacement cost are all trends that reduce the effective coverage while maintaining or increasing the premium.

The DIC Policy as a Gap-Filler

A Difference in Conditions (DIC) policy is specifically designed to fill gaps in standard commercial property coverage. DIC policies typically cover earthquake, flood, and other perils excluded from the base policy. In the climate-change context, a DIC policy can be the difference between a total uninsured loss and a covered claim. For a complete overview, see our article on Difference in Conditions policies.

Key advantages of DIC policies for climate-related risks:

• Flood coverage outside the NFIP. DIC policies can provide flood limits far exceeding the NFIP maximum and can cover properties that the NFIP will not insure or that have been rated out of affordability.
• Earthquake coverage. For businesses in earthquake-prone areas, a DIC policy may offer earthquake coverage at lower cost or higher limits than the California Earthquake Authority or the standalone earthquake market.
• Coverage for perils the base policy sublimits or excludes. When the base commercial property policy imposes a sub-limit on water damage, excludes certain types of earth movement, or restricts wildfire coverage, a properly structured DIC policy can fill those gaps.
• Broader “all risk” language. Some DIC policies use broader coverage language than the base policy, which can catch perils that fall through the gaps of the standard ISO forms.

Practical Steps for Climate-Resilient Coverage

The gap between policy language written decades ago and current climate reality is not going to close on its own. Carriers are not voluntarily expanding coverage to address new perils — they are restricting it. Business owners must take affirmative steps to protect themselves:

1. Conduct a climate-specific coverage audit. Review your commercial property policy with a focus on climate-related exposures: flood, earth movement, smoke, extreme heat, power shutoff, and wildfire. Identify every exclusion, sub-limit, and deductible that applies to these perils.
2. Obtain flood coverage even if you are not in a flood zone. FEMA flood zones are backward-looking. Atmospheric rivers do not respect zone boundaries. Private flood insurance, NFIP coverage, or a DIC policy with flood coverage should be part of every California commercial property program.
3. Evaluate DIC coverage for gap-filling. A DIC policy can cover earthquake, flood, and other excluded perils at a fraction of the cost of a total loss. The premium for a DIC policy is almost always less than the cost of one uninsured event.
4. Review spoilage and equipment breakdown endorsements. If your business has temperature-sensitive inventory or depends on continuous power, confirm that your spoilage endorsement covers external power failures (not just mechanical breakdown) and that your equipment breakdown coverage extends to HVAC systems under heat stress.
5. Document your HVAC filtration and maintenance. For wildfire smoke claims, carriers will argue that smoke infiltration resulted from inadequate filtration or maintenance. Maintain records of filter changes, HVAC servicing, and air quality monitoring.
6. Establish business continuity plans for PSPS events. If your business is in a PSPS-prone area, invest in backup power generation and document the cost. The extra expense of maintaining operations during a power shutoff may be covered under your policy, but you need to document the expense and tie it to the covered event.
7. Start renewal discussions early.In the current California market, waiting until 30 days before renewal to address commercial property coverage is too late. Begin discussions with your broker 90–120 days before renewal to allow time to market the risk broadly and negotiate terms.