Alif v. California Fair Plan Association, challenges the scope of insurance coverage provided by the California FAIR Plan Association (CFP), the state's insurer of last resort. The plaintiff, Jay Aliff, alleged that CFP improperly limited coverage for smoke damage under its fire insurance policies, potentially leaving policyholders without adequate protection in the event of wildfire-related losses.
The court examined whether CFP's policy language complied with California's mandatory fire insurance standards. At issue were provisions defining "direct physical loss" and the specific requirements for proving smoke damage, as well as the policy's dispute resolution procedure. The court ultimately ruled that several key aspects of the CFP policy unlawfully restricted coverage compared to the standard fire policy requirements under California Insurance Code § 2070 and §2071.
Background Facts
Jay Alif owned a cabin near Lake Tahoe that he claimed sustained smoke damage in the 2020 Mountain View Fire. He was insured through the California FAIR Plan, which provides insurance coverage to many property owners who cannot obtain it otherwise, particularly in high fire-risk zones. Alif filed a claim, and the FAIR Plan offered him a reduced payment after applying depreciation and the deductible. This was in contradiction to a higher estimate completed by an adjuster.
This lawsuit followed complaints that the FAIR Plan was engaged in a pattern of denying smoke damage claims after wildfires. The Department of Insurance investigated and directed the FAIR Plan to change its policy language as to smoke damage claims as they were in violation of the law. Alif claimed that CFP failed to follow these directives and continued to deny claims based on its narrow definition of "direct physical loss' and it's requirement that coverage was only available to damage that was perceptible by sight or smell. Alif originally hoped to bring a class action, but class certification failed.
California's Standard Fire Policy Insurance Policy Requirements
At the heart of the dispute are provisions of the California Insurance Code, § 2070 and §2071, which set forth the standard form fire insurance policy used in California. It states an insurer may depart from the standard form so long as the policy, when viewed as a whole, provides coverage that is substantially equivalent to, or more favorable to, the insured.
The CFP policy provides coverage for "direct physical loss," defined as "any actual loss or physical damage evidenced by permanent physical damages or changes to the covered property caused by smoke damage." The definition of smoke damage includes sudden and accidental physical loss from smoke, including airborne particles like soot, ash, or char debris that are visible to the "unaided human eye", or "odors detectable by the unaided human nose." The policy specifically excludes reliance on laboratory testing or individual subjective senses.
The CFP policy also contains a unique dispute resolution process for smoke damage claims. Homeowners may choose between two methods. Under Method 1, both sides appoint a neutral party, who jointly select a third person to serve as an umpire. This three-person panel inspects the property and determines by majority vote whether evidence of smoke damage exists. The decision is binding. Alternatively, Method 2 allows for a sole neutral umpire to make the determination, with the parties sharing the cost. If the smoke damage is confirmed through either method, but the parties dispute the amount of loss, the claim proceeds to a separate appraisal process governed by the policy's appraisal provision.
Did the CFP Policy Meet the Minimum Statutory Coverage Standards?
In evaluating the merits of the case, the court examined whether the California FAIR Plan Association's revised policy language complied with the minimum coverage requirements set by California's standard form fire insurance policy. The court noted the Insurance Code's standard form simply provided coverage for "loss by fire" without distinguishing between fire damage and smoke damage.
The court also considered CFP's own internal training materials provided to claims staff and inspectors. One example used in those materials described a wildfire near a property producing smoke, gases, and particulates that enter a dwelling and cause damage. The materials explicitly identify the "peril" in that scenario as fire, because the wildfire set the chain of events in motion.
Additionally, the court reviewed a memorandum CFP sent to its network of registered insurance brokers in April 2017. This memo included a customer notice explaining revisions to the policy. It acknowledged that the new policy contained "several significant changes, including updates that made some exclusions clearer. It further stated that the definition of "direct physical loss" had been revised to require permanent physical damage or changes to covered property. The notice candidly informed policyholders that this change "will result in denial of claims that might have been paid under the prior policy."
CFP argued although certain language in the notice could be viewed as reducing or limiting coverage, it was "speculative and equivocal." The court disagreed and noted the statement that acknowledged a revised definition of direct physical loss represented a material reduction in coverage compared to prior versions of the policy. It concluded that the plain language of the notice indicated that the coverage provided may fall short of the requirements of the Insurance Code.
The Permanent Damage Requirement
The court next analyzed whether the CFP requirement that smoke damage be evidenced by "permanent physical damage" complied with California law. The plaintiff argued that this requirement conflicted with the California Supreme Court's decision in Another Planet Entertainment LLC v. Vigilant Ins. Co. (2024) 15Cal.5th 1106. Another Planet addressed whether the presence of COVID-19 constitutes "direct physical loss or damage" under a commercial property insurance policy. The Court held that while "direct physical damage" requires a distinct, demonstrable change to property, the change does not need to be visible to the naked eye. Damage at a microscopic level may satisfy constitute direct, physical harm if there is harm to the property itself.
The Court also distinguished between temporary, easily remediated conditions, or "evanescent presence," and more serious circumstances such as saturation, infiltration, or persistent contamination that require active remediation. Evanescent damage is usually identified by a temporary condition or something that could easily be removed by a simple cleaning.
Applying those principles to the CFP policy, the plaintiff contended that the policy's strict requirement for permanent physical damage imposes a higher standard than the law allows. The plaintiff pointed out that the Another Planet decision recognized that persistent or engrained damage may qualify as direct physical loss, but it does not require the damage to be permanent. The court agreed that persistent and permanent are not synonymous and Another Planet does not impose a permanence requirement.
Further, the Court noted that the need to deeply analyze the meaning of permanent raised concerns under long-standing California law governing insurance policy interpretation. Relying on State Farm Mutual Auto Ins. Co. v. Jacober (1973), 10 Cal.3d 193 and Haynes v. Farmers Ins. Exchange, (2004) 32 Cal.4th 1198, the court emphasized that any provision limiting coverage must be conspicuous, plain, and clear. It rejected CFP's argument that this rule does not apply because the requirement appears in a coverage definition rather than a formal exclusion. It concluded regardless of placement, a definition that narrows the scope of coverage triggers the same legal standards for clarity and notice.
Based on this analysis, the court found that CFP's requirement that damage be evidenced by permanent physical damage imposed a limitation narrower than the general fire coverage mandated under the standard form policy set forth in Insurance Code §2071.
The Perceptibility Standard
The Court next considered whether the CFP language requiring smoke damage to be visible to the "unaided human eye" or "detected by the unaided human nose of an average person" complied with California law governing the definition of direct physical loss.
The plaintiff argued that this perceptibility requirement is also inconsistent with the California Supreme Court's decision in Another Planet. CFP asserted that when the plaintiff's claim arose, its policy definition aligned with earlier case law, specifically Ward General Ins. Services, Inc. v. Employers Fire Ins. Co, (2003), 114 Cal.App.4th 548. In Ward, the court held that the loss of an electronic database did not constitute direct physical loss because the data lacked material existence. In other words, it was not tangible matter or perceptible via the senses.
The Court rejected those arguments, noting that whether the policy conformed with older precedent is irrelevant to whether it complies with current law as clarified in Another Planet. The Court further found that the perceptibility requirement raised issues of clarity and enforceability. Again drawing from State Farm Mutual Ins. Co. v. Jacober, the court emphasized that any policy language that limits coverage must be conspicuous, plain and clear. Phrases like unaided human eye" and "unaided human nose of an average person" are inherently vague. It pointed out excluding both laboratory testing and the insured's own subjective senses leaves policyholders without a reliable way to determine whether a particular loss qualifies for coverage.
Both parties also citied Gharibian v, Wawanesa General Ins. Co., (2025) 108 Cal.App.5th 730, a case involving smoke and ash damage from the 2019 Saddle Ridge wildfire. In that case, the trial court found no physical loss, and the appellate court affirmed a finding that physical damage need not be visible but must result in harm or impairment to the property. The Court in the current case noted a key distinction. Gharibian did not involve a question regarding the minimum fire coverage standards under the California Insurance Code. Moreover, in Gharibian, there was evidence that the wildfire caused no actual damage to the property, thus any comparison here really amounted to apples to oranges.
Here, it was undisputed that the fire damaged two windows and destroyed landscaping, which was physical damage beyond superficial smoke contamination. Still, the court clarified it was not deciding whether the plaintiff would ultimately prevail on a claim for coverage under the correct standard. Instead, the issue before was whether CFP's policy language was consistent with California Insurance law. The court concluded it fell short.
Dispute Resolution Procedure
The court next addressed the legality if the CFP's dispute resolution process for smoke damage claims. The plaintiff argued that the process was unlawful because it does not appear in California's standard form fire policy, is not otherwise authorized by California law, reduces the scope of coverage, and omits the declared disaster exception found in the standard form policy.
The court agreed in part. It found the dispute resolution process was unlawful to the extent it relied upon the CFP's definition of "direct physical loss" and "smoke damage." Specifically, the requirements that the damage be evidenced by permanent physical changes to the unaided human eye or detectable by the unaided human nose. Because the court already determined those definitions were inconsistent with California law and the Supreme Court's decision in Another Planet, the dispute resolution process that enforced those definitions was likewise invalid. However, the court rejected the plaintiff's claim that the dispute resolution process was unlawful for failing to include the declared disaster exception. The CFP policy does, in fact, incorporate that exception under section 9 of its conditions.
Key Takeaways
Ultimately the court issued a formal declaration holding as follows:
- The CFP policy's definition of "direct physical loss" violated the Insurance Code section 2070 because it provided coverage less favorable than, and not substantially equivalent to, the coverage required by the standard form fire policy.
- The same definition is also unlawful under the standards set forth in State Farm Mutual v. Jacober because it limits coverage in a way that is not conspicuous, plain, and clear to policyholders.
- The CFP's policy requirement that smoke damage must be visible to the unaided human eye or detected by the unaided human nose of average person, while excluding the use of laboratory testing or the insured's own subjective senses, is unlawful under the Insurance Code §2070 for providing coverage less favorable than the standard form.
- The perceptibility requirement is likewise unlawful because it restricts coverage in a manner that is not sufficiently clear or understandable to a typical insured.
- The dispute resolution process for smoke damage claims is invalid to the extent that it relies on the unlawful definitions of direct physical loss and smoke damage.
- The dispute resolution procedure is not unlawful on the basis of the declared disaster exception, as the CFP policy incorporates that exception in its own terms.
Moving Forward
The court's ruling serves as a clear directive to insurers that policy language that narrows the scope of fire coverage below minimum standards established by California's Insurance Code is impermissible. Specifically, defining "direct physical loss" to require permanent physical damage and limiting smoke damage claims to what can be seen or smelled by the unaided human senses violates both statutory requirements and the standards for clarity set by California courts. Likewise, a dispute resolution process that depends on such restrictive definitions cannot stand.
As California continues to grapple with an increasing number of wildfire claims, this decision reinforces the obligation of insurers, including the Fair plan, to ensure their policy terms comply with both the letter and spirit of California's insurance laws.
