The first year after the catastrophic Palisades and Eaton fires was triage.
People find temporary housing, stabilize their finances, and start the slow work of documenting what happened and obtaining repair and remediation scopes. Carriers surge staff, issue advances, and thousands of claims are pushed through an emergency workflow. Government agencies focus on safety, debris removal, and restoring access.
Year two is when claims either get revisited and settled by carriers or turn into lawsuits. Deadlines start to matter, temporary housing becomes a budget-breaking line item, permitting and code requirements become real costs, and "we'll see what happens" becomes "we've provided enough chances."
The second year after the Palisades and Eaton fires will bring a noticeable rise in first-party property litigation — not because policyholders suddenly became more litigious, but because the structural friction points of these claims become harder to absorb without formal dispute resolution.
The scale of these two events sets the stage. CAL FIRE reports the Palisades Fire started Jan. 7, 2025, burned 23,448 acres, and destroyed 6,837 structures, with containment on Jan. 31, 2025. CAL FIRE reports the Eaton Fire also started Jan. 7, 2025, burned 14,021 acres, destroyed 9,414 structures, and was contained Jan. 31, 2025. Verisk's Extreme Event Solutions estimated insured industry property losses from the two fires combined at $28 billion to $35 billion.
Against that backdrop, the year-two litigation drivers are predictable — and preventable — if carriers can find the problem claims, direct adequate resources to them, and settle them.
The most reliable litigation trigger
Loss of use (Additional Living Expense, or ALE) is the coverage most tied to time. It is also the coverage that creates the most immediate pressure. It determines whether a family can stay near a child's school, keep a stable commute, or avoid repeated moves in a disrupted rental market.
California law sets a floor: For covered losses connected to a declared state of emergency, ALE "shall be for a period of no less than 24 months" from inception of the loss, and insurers must grant extensions up to 36 months when delays are beyond the insured's control (permit delays, material shortages, lack of contractors), while still remaining subject to policy provisions and limits. The same statute also states that the policy "shall not limit the policyholder's right to recovery" if the home is rendered uninhabitable by a covered peril (while allowing a "reasonable alternative remedy" in lieu of ALE payments).
Those statutory time floors do not solve limit exhaustion or stop disputes about what counts as "habitable." Commissioner Ricardo Lara's Feb. 14, 2025, notice addressed this directly, emphasizing that uninhabitability is not limited to utility disruption and can be driven by health-and-safety conditions tied to fire debris and ash. The notice cites Insurance Code § 2060(b)(2) and instructs insurers to exercise due diligence in habitability determinations and to continue ALE when neighborhoods or homes remain uninhabitable, subject to statutory timeframes and policy limits.
Even with that guidance, year two is where ALE disputes surge. The most common escalation pattern occurs when the insured is still disputing scope or pricing and the carrier terminates or compresses ALE because progress is not "fast enough," or because the carrier's scope is narrower than the insured's chosen remediation or rebuild plan.
From a claims-handling standpoint, cutting off ALE while a scope or habitability dispute remains unresolved is a near-guaranteed escalation event. It converts a negotiation into a necessity: the insured either accepts a disputed scope to keep housing funded, or litigates. Many cannot financially wait for litigation, and the practical outcome is worse: they accept less, relocate permanently, or sell and exit the community.
At the same time, many carriers are continuing to pay ALE, if for no other reason than to stave off litigation risk while they attempt to find and solve the problem claims. Those carriers will be better in the long run as long as they do not get comfortable thinking continuing ALE payments is going to prevent a lawsuit if the other problems don't get fixed quickly. After all, ALE is not unlimited by duration or dollar amount for the vast majority of claimants, and they want to return home.
Jurisdictional, code reality arrives in year two
Year one is estimating, emergency measures, and building homes back like they were — often old and out of code. Year two is design development, plan check, and permitting, where ordinance, geotech, grading, coastal limitations, and agency overlap become real drivers of both time and cost.
Local agencies have attempted to streamline rebuilding. For example, Los Angeles County has published a "Road to Rebuilding" framework that breaks the process into debris removal, plans, permits, construction/inspections, and certificate of occupancy with dedicated rebuilding resources specific to the Eaton and Palisades fires. The City also has issued emergency executive orders aimed at rebuilding pathways, including "eligible like-for-like" projects within fast-track rebuilding initiatives.
But in fire-impacted hillside and coastal-adjacent areas, this is not easy. Coastal constraints alone can shift timelines and budgets. The California Coastal Act includes an exemption for replacement of legally existing structures destroyed by a disaster when conditions are met, including same use, same location, and limits on size increases. In the Palisades area, LADBS guidance underscores that soil, compaction, and geological reporting can become a gating issue in the grading permit review process. This is exactly the kind of requirement that is invisible in month two and unavoidable in year two.
This is where ordinance-or-law and site-condition disputes ripen:
- Is a requirement truly "code" or an elective upgrade?
- Is the repair related to the dwelling if only that property has code upgrade coverage applicable, versus other structures or land stabilization?
- Is a cost a necessary site condition (geotech, grading, retaining, drainage, access) or a non-covered betterment?
- Who pays for redesign cycles driven by evolving agency requirements?
- How do you reconcile a pre-permit estimate with post-plan-check reality?
These questions do not get resolved by generic estimating templates. They get resolved by early, file-specific planning and candid communication about what is uncertain and what will predictably change.
Smoke claims: When scope wars replace problem-solving
In year one, many smoke and contamination claims are still approached as a problem to solve: Investigate, test, scope, remediate. At the same time, carriers have been busy pushing through cookie-cutter approaches, and now they have to start honing in on the claims that remain unresolved by those efforts — which is a lot, as the cookier-cutter approaches tend to be extremely conservative and more reflective of a true wildfire than an urban conflagration. In year two, too many turn into endurance contests: "We'll extend benefits only if you follow our scope," or "You could have completed our scope already, so we're done."
Two practical realities are also colliding for claimants who followed the carrier-approved approach of general cleaning: clearance testing can fail repeatedly when the remediation plan is too narrow, and each cycle burns time and money while limits erode.
That creates a uniquely combustible year-two dynamic: Repeated remediation attempts, rising expert involvement, and shrinking limits that eventually make "complete remediation" financially impossible. Similarly, for those who have resisted attempting the carrier-approved approach altogether to save their limits and get it done right the first time, carriers are starting to end the discussion and force the insured to try their methods or litigate. When the claim reaches that point, litigation becomes less about "winning" and more about salvaging a viable recovery plan.
Litigation is not inevitable
There are carriers handling these fires well: Timely decisions, consistent claim leadership, transparent scope positions, and valuation that reflects post-catastrophe reality rather than pretending it is a normal market. Year two will punish the opposite approach.
If carriers want fewer lawsuits, the roadmap is not complicated: Continuity of claim leadership, early and realistic valuation, written scope decisions that can be updated when permitting realities change, and a disciplined ALE plan that does not turn housing into leverage. California's own statutory framework on ALE timeframes and uninhabitability underscores that these are not academic issues, they are expected claim practices in catastrophe recovery.
Year two is where recovery becomes reconstruction. It is also where unresolved insurance issues stop being "claims" and start being "cases."
Daniel Veroff is a first-party property insurance attorney representing policyholders in catastrophic loss disputes and complex coverage matters. He can be reached by sending an email to dveroff@merlinlawgroup.com.
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