As wildfire risk grows across the West, lawmakers are reconsidering when and how to make utilities pay for fire damages. Will changes to liability law prevent a crisis or create a new one?

Wildfires are becoming more destructive across much of the United States, and the trends that are making fires more dangerous and costly—including climate change, development in high-fire-risk areas, unsafely built and maintained communities and landscapes, and inadequate resources and staffing for both pre-fire risk reduction work and firefighting when wildfires occur—are likely to continue. As the monetary impact of wildfire disasters continues to reach into the billions, the question of who should bear these costs is becoming existential for electric utilities, which can face bankruptcy when they are required to pay for the damages caused by catastrophic fires ignited by their power lines. To address the potential crisis this creates for the utility industry, many Western states are reconsidering when and how the law holds electric utilities liable for wildfires. However, states that limit utility liability without also addressing the underlying causes of growing fire risk may end up creating more problems than they solve.

Utility Fire Liability: Not Just a California Problem

California’s unique “inverse condemnation” legal standard holds utilities responsible for property damage resulting from fires ignited by their infrastructure, regardless of whether or not they started the fire negligently. This standard played a key role in the bankruptcy of one of the nation’s largest utilities, Pacific Gas & Electric Company, following a series of deadly fires. However, utilities operating in other states, like Oregon and Hawaii, have also recently incurred multi-billion-dollar liabilities following catastrophic wildfires.⁸ These events make it clear that electric utilities across much of the country—not just in California—can, and in some cases will, be held responsible for fire damages large enough to put them out of business.

The growing possibility that wildfire liability could cause a utility to go bankrupt makes it harder for utilities to borrow money and attract outside investment, even for utilities that have never been linked to a catastrophic fire. This rising credit risk results in higher overall costs for utilities, in turn leading to higher rates for customers, and can slow or outright block the financing and construction of energy infrastructure. This is a growing problem not just for investor-owned utilities, but also for not-for-profit electric providers like municipal utilities and electric cooperatives. For states where new infrastructure is needed to meet rising demand for electricity, but fires are becoming increasingly dangerous, this means that finding a way to reduce utilities’ overall wildfire risk exposure will be key to maintaining a functioning electric grid.

States that are newly facing these circumstances may take inspiration from California’s approach, given that California has created a legal and regulatory framework specifically for utility-ignited wildfires. On the other hand, they may see California’s recent history of fires leading to high costs and liabilities for utilities and high electric rates for customers as an example to be avoided.¹ Balancing the need to hold utilities accountable for fire safety with the need to keep electricity affordable presents a serious policy challenge. Over the last year, several Western states have responded to this challenge and concerns raised by utilities by considering new laws on the subject of utility wildfire liability. While it is too soon to say for sure what the impact of these laws will be, several themes have emerged across these different approaches. The questions and concerns raised by these recent changes to liability law may be particularly relevant for California lawmakers currently considering modifications to the California Wildfire Fund as proposed by Governor Newsom.

What’s in a Wildfire Mitigation Plan?

One increasingly common approach for a utility to address its potential wildfire risk is implementation of a wildfire mitigation plan (WMP), a document which describes the specific measures the utility is taking in order to reduce the likelihood of its infrastructure igniting a dangerous fire. Some states have chosen to require or incentivize utilities to create WMPs: Over the last year, Arizona, Hawaii, Idaho, Montana, North Dakota, Texas, Washington, and Wyoming have passed new laws creating standards for utility WMPs, joining California, Colorado, Nevada, Oregon, and Utah, which already have WMP frameworks in place. However, what states require in a WMP—and what benefit utilities get in exchange for creating one—varies widely from state to state. These variations can have serious consequences when WMPs are incorporated into a state’s liability framework.

Among the important distinctions between different states’ legal approaches to WMPs are whether creating a WMP is voluntary or required, what information about mitigation measures must be included, which types of utilities are covered, and how the state provides regulatory guidance and oversight. These choices involve some critical tradeoffs: a more robust process that requires utilities to implement substantial mitigation measures is likely to improve safety outcomes, but is also likely to make serious demands on both utilities’ and regulators’ available resources and personnel, and can generate significant expenses that are ultimately passed on to ratepayers and taxpayers.² In contrast, less robust WMP standards are cheaper and more straightforward to implement, but potentially less effective in lowering fire risk.

Although WMPs are increasingly seen as a standard practice, states that have created legal WMP frameworks have made distinct choices about how to strike this balance. This means that the differences between state approaches to WMP requirements and regulation can be dramatic. Under California’s framework, for example, utilities are required to create, implement, and regularly update extensive WMPs, which in turn are reviewed by a state regulatory agency dedicated specifically to energy infrastructure safety.³ This is a much more demanding system for WMP drafting and review than the frameworks recently adopted in states such as Arizona, where WMPs are required for certain utilities, but considered administratively approved if regulators do not make any further requests within 120 days of receipt, and North Dakota, where WMP filings are voluntary and not subject to external regulatory review.

These distinctions between WMP processes and standards are likely to increase in practical impact as fire risk continues to grow and more utilities face potential liability for catastrophic wildfires. Several Western states have recently modified their wildfire liability laws in order to hold utilities which have met their WMP requirements to a different—and often significantly more protective—standard. As these new laws take effect, state decisions about whether a utility met its WMP requirements are likely to face scrutiny from fire victims and the public, particularly if they result in a utility not being found liable for some or all of the damages resulting from a deadly or highly destructive fire ignited by its infrastructure.

When are Utilities Liable for Fires?

State tort law establishes what the victims of a fire have to show in order to hold a utility liable. Until recently, utility wildfire liability in states other than California tracked the general law of negligence and required victims to establish that the fire caused them harm, that the utility ignited the fire, and that the utility acted negligently in doing so. Several states have responded to utilities’ increasing exposure to wildfire risk by passing laws that modify these liability standards. This might be done in order to create a clear standard for utility-ignited fires in advance, so that utilities know what types of precautions they are legally expected to take and, when fires occur, the process of determining whether a utility is liable is more straightforward.⁴ A state might also choose a liability standard that is more protective of utilities than the existing law, under the reasoning that setting a higher bar to hold utilities responsible for fires means that utilities will face less potential wildfire liability and remain more financially healthy, which, in turn, reduces overall costs passed on to investors and customers.

Several states have created more protective wildfire liability standards which apply to utilities operating in compliance with a WMP.⁵ By making it harder to sue utilities—but only as long as they participate in the WMP process—this approach has the potential to stabilize utility finances while still requiring utilities to take action to mitigate wildfire risk. However, there are important distinctions between how these laws operate. Utah law bars a finding of negligence for utilities that ignite fires as long as they have completed the relevant work described in their WMP in the area where the fire occurs.⁶ Other state laws, including those recently adopted in Montana, North Dakota, and Wyoming, do not bar a finding of negligence, but create a presumption (which can be challenged and disproven in court) that a utility was not negligent as long as it acted in compliance with its WMP. Texas’ new law does not create such a presumption, but prevents liability if the utility was in compliance with its WMP and was not negligent. Like state requirements for WMPs, the exact mechanics of these liability modifications may seem abstract on paper, but they are likely to prove significant and controversial if they become the factor that determines whether or not a utility is required to pay for the damages from a catastrophic fire.

What Damages Should Utilities Pay For?

Liability law establishes what a fire victim must show to successfully sue a utility; when that happens, damages are the amount of money the utility can be required to pay the victim and the kinds of harms it can be required to compensate them for. Typically, victims can seek compensation for both economic damages, like the destruction of property or loss of income, and non-economic damages, like death, injury, and suffering. In addition to compensation for these harms, the total amount of money that utilities pay may also include punitive damages designed to create additional financial consequences for bad behavior. Several states have recently modified their legal standards for each of these types of damages. As with making it more difficult to sue a utility in the first place, limiting how much a utility can be sued for when it is held responsible for a fire is one way to reduce utilities’ potential wildfire liability. This distinction has been highlighted by lawsuits against PacifiCorp in Oregon following the 2020 Labor Day fires, where non-economic and punitive damages have made up a significant amount of total utility liability. While these cases are still being litigated, the structure of the judgments indicates that limiting these damages could significantly reduce utilities’ overall financial exposure to wildfire liability.

One approach to modifying damages is to simply set a maximum dollar amount for wildfire claims. New Mexico recently considered, but did not pass, legislation that would have capped utilities’ total damages at $2 million per fire, regardless of the number of lawsuits or victims.⁷ Damages can also be capped per lawsuit and type of damages. For instance, Kansas’ new law limits punitive damages to $5 million per claim. States may also choose to require victims to show a greater degree of injury to the victim or wrongdoing on a utility’s part in order to hold a utility responsible for certain damages: Wyoming allows recovery of non-economic damages only in the event of injury or death, while Arizona allows punitive damages only when the utility’s conduct was not just negligent, but also intentional or outrageous. These modifications mean that utilities are exposed to less financial risk from wildfire liability, but they also limit fire victims’ ability to seek compensation from utilities—even in situations where the utility acted negligently or victims suffered serious harms—which increases the difficulty for affected individuals and communities to recover from utility-ignited wildfires.

Like non-economic damages, economic damages can also be modified. Utah law defines economic damages as either the cost to restore a property to its pre-fire condition or the difference in market value of the property immediately before and after the fire, whichever is lower. As seen in the aftermath of the Los Angeles fires, rebuilding costs following a catastrophic fire can be higher than the pre-fire market value of a property, meaning that utility liabilities calculated this way would be much lower than if the cost of restoration alone was used to determine damages. While using this definition of economic damages could potentially reduce utilities’ overall financial exposure to wildfire liability, it could also mean that, even after being compensated for their losses, fire victims would be left without enough money to rebuild.

Are Wildfire Funds the Solution?

Because California’s liability framework is based on the California Supreme Court’s interpretation of the state constitution, California lawmakers are relatively constrained in their ability to modify the state’s approach to utility fire liability. In response, the state has turned to an alternative method to contain utilities’ overall exposure to wildfire liability and stabilize utility finances: the California Wildfire Fund (CWF), an insurance-like system that pools money across participating utilities and uses it to pay for wildfire claims. The CWF stabilizes utility finances not by limiting liability or damages, but by reimbursing utilities that meet certain requirements, including paying into the fund and compliance with a state-approved WMP, for all eligible damages over $1 billion resulting from catastrophic wildfires. Although no other states have adopted this system, Utah recently created a legal framework for large utilities to create their own wildfire funds, and Hawaii passed legislation to conduct a study exploring options for a wildfire recovery fund that could operate in a similar way.

Even in states without California’s unique legal framework, wildfire funds have some advantages compared to other approaches to utility fire liability. They reduce utilities’ overall financial exposure to wildfire risk, but, through measures like not fully reimbursing fire damages and only covering claims for utilities that comply with their WMPs, can still incentivize utilities to take safety precautions. Further, unlike limitations on liability or damages, they do not inherently make it more difficult for fire victims to sue. Because wildfire funds can reduce total utility losses while still requiring utilities to compensate fire victims for damages, they may be a more practical and politically feasible way to stabilize utility finances than approaches which simply place new limits on liability. As events following the recent Los Angeles wildfires show, however, significant uncertainties exist about the long-term viability of the wildfire fund model.

The massive potential size of damages from catastrophic fires means that even a large fund like California’s can be depleted by a single wildfire, leaving participating utilities as exposed to financial risk as they were without it. Gathering capital for a wildfire fund—whether in the form of pre-payments to start the fund or subsequent payments to replenish it after a fire—requires difficult decisions to be made about how large the fund should be, where payments into the fund should come from, how these costs are passed on to ratepayers and shareholders, and how they ultimately affect electricity bills.⁹ Following a fire, it may also be controversial to use the fund to reimburse utilities for some fire liabilities, such as claims where the legal right to sue has been transferred from fire victims to third parties like insurers and hedge funds. If California is able to successfully address the open questions facing its fund and achieve the goals of stabilizing utilities, compensating victims, and minimizing bill impacts for ratepayers, it will serve as a model for other states facing rising wildfire risk. At the same time, in order to stabilize the CWF itself by reducing the total amount of damages eligible for reimbursement, California lawmakers may follow the example of other states and attempt to modify utility liability through legislation.

Are We Trading a Utility Crisis for an Insurance Crisis?

Recent legislation to limit utility wildfire liability has faced criticism from the insurance industry, which argues that these laws transfer the costs of wildfires away from utilities, reducing utilities’ incentive to mitigate fire risk and placing the financial burden of fires on insurers and homeowners. Like the utility industry, the insurance industry has been unsettled by the increasing frequency and destructiveness of climate-driven disasters like catastrophic wildfires. Because making it more difficult to recover damages from utilities raises the overall amount of fire losses that insurers are responsible for paying, it is likely that these new laws will cause insurers to act to limit their own financial exposure to wildfires by raising prices and writing fewer policies in areas facing rising fire risk. In the event of a fire, homeowners who cannot access or afford adequate insurance and are not able to sue utilities for their damages will struggle to pay for recovery and rebuilding. Therefore, while these laws may stabilize electric utilities, they also have the potential to worsen the problem of wildfire elsewhere.

While insurers’ concerns about how these new laws transfer wildfire risk are understandable, the fundamental problem is not just the allocation of wildfire losses, but the increasing frequency and size of the losses themselves. Utilities can and should prevent their infrastructure from creating an ignition during dangerous conditions, but many of the factors that determine whether an initial spark becomes a catastrophic fire, like how prepared homes and landscapes in the area are for wildfires, are beyond a utility’s control. This means that holding utilities solely or principally liable for fires can have the effect of disincentivizing fire mitigation for other private and public entities that should also be taking action to reduce the risk of catastrophic fire.¹⁰ In California, placing the responsibility for wildfire mitigation with utilities has led to high spending and unaffordably high electricity rates, but has not put a stop to deadly and destructive fires. Other states facing rising fire risk are attempting to avoid this outcome by modifying their utility liability laws. Whether these new laws will ultimately be helpful or harmful will depend not just on how they allocate costs between industries, but on how well they can be incorporated into a systemic approach that addresses the root causes of growing wildfire risk by improving landscape health and making communities more resilient.

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¹ California’s average electricity prices are the second-highest in the nation after Hawaii.
²  Implementing mitigation measures can also negatively impact reliability, such as when power is shut off to avoid an ignition during dangerous weather conditions.
³ This more rigorous system applies only to the state’s investor-owned utilities, although public utilities are also required to create and file WMPs per Cal. Pub. Util. Code Ann. § 8387(b)(1).
⁴ For instance, Kansas’ recently created standard requires plaintiffs to show that their loss was due to a wildfire caused by the utility, but does not modify the existing standards for claims like negligence or trespass that would be the basis for a lawsuit.
⁵ In contrast, North Dakota’s recent wildfire bill establishes that utilities are not subject to strict liability for fires regardless of whether they have a WMP, although it also creates additional liability protections for utilities with WMPs.
⁶ Or if they have been prevented from completing that work by another governmental entity like a state agency, per Utah Code Ann. § 65A-3-4(3)(b)(i).
⁷ This liability cap, which also would have limited non-economic damages to injuries specifically caused by burning, would have applied only to certain electric cooperatives, not other types of utilities like investor-owned electric corporations.
⁸ Utilities remain responsible for the first $1 billion in damages from a fire.
⁹ Analysis conducted prior to the passage of legislation creating the CWF weighed the affordability impact of requiring ratepayers to pay into a fund against the potentially greater affordability impact of unbounded utility liability in the absence of a fund, which could lead to increased utility credit risk and high borrowing costs that would also be passed on to ratepayers.
¹⁰  An alternative approach has been taken in Hawaii, where a significant amount of settled damages from the 2023 wildfires that devastated the community of Lahaina are expected to be paid by a major landowner accused of managing vegetation on its property in a way that increased the risk of fire, even though the Lahaina fire was ignited by a utility. Settlement structures of this type can incentivize landowners and other non-utility stakeholders to mitigate fire risk.

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Eric Macomber joined the Climate and Energy Policy Program as a Wildfire Legal Fellow in September 2022. His work focuses on law and policy issues relating to fire risk and mitigation in the wildland-urban interface.

Rachel Schten, J.D. ‘25 contributed to this project as a Research Assistant.

This post was originally posted on the Climate and Energy Policy Program blog.