California Earthquake Authority Weighs In On Inverse Condemnation In Its New SB 254 Report

We are closely tracking the newly released Senate Bill 254 (Becker, 2025) Study Report, prepared by the California Earthquake Authority (CEA) as Administrator of the Wildfire Fund. While the report outlines several pathways to stabilize California’s insurance and energy markets, one of the most significant proposals is the recommendation to fundamentally overhaul inverse condemnation liability for utilities in California.

I. The Strict Liability Standard Under Fire

In California, courts have consistently applied inverse condemnation liability —rooted in Article I, Section 19 of the State Constitution—to investor-owned utilities (IOUs). The underlying rationale is that because IOU facilities serve a public use, the costs of property damage resulting from their operations should be socialized and spread among ratepayers. However, as the report notes, this strict liability standard has created unsustainable financial burdens, driving up energy costs and threatening utility solvency.

A. Option 2.2.1: Eliminating Inverse Condemnation

To equitably allocate catastrophe burdens, the report presents “Option 2.2.1: Eliminate inverse condemnation for electric and gas utility-caused wildfires.” Specifically, the report recommends proposing and sponsoring a constitutional amendment and companion implementing legislation to eliminate the application of inverse condemnation to utility-caused wildfire damages, instead reverting such claims to a fault-based liability framework (under traditional tort liability claims such as negligence).

Because inverse condemnation arises out of the California Constitution, the report acknowledges that modifying this doctrine would likely require a constitutional amendment approved by voters. Such an amendment would undoubtedly face fierce litigation, but if successful, it would pivot utility liability from potential strict liability to ordinary tort principles. Plaintiffs would instead be required to prove negligence. The report argues that “Moving to a negligence or fault-based standard would align California with the rest of the country, potentially improving utility credit ratings, reducing risk premiums on debt and insurance and the resulting increased costs for ratepayers.” Furthermore, the report notes that “inverse condemnation allows survivors to recover attorneys’ fees on top of their damage award; thus, survivors would need to pay attorneys’ fees out of their award if inverse condemnation were eliminated.”

B. Option 2.2.2: Modifying Damages

Recognizing that a fault-based standard might not entirely prevent bankruptcy-level exposure for utilities, the report also suggests “Option 2.2.2: Modify the damages for which electric and gas utilities are liable outside of inverse condemnation.” Under this option, the report proposes to “Enact a coordinated package of liability reforms to moderate the overall scale of utility wildfire-liability exposure while protecting compensation designed to support survivor rebuilding and recovery.” Key recommendations under this option include:

• Harmonizing Damages: Eliminating punitive damages against IOUs to match the protections currently afforded to publicly owned utilities.
• Capping Additional Living Expenses (ALE): Setting limits on ALE liability for high-value properties and standardizing the duration to a maximum of five years to account for lengthy rebuilding timelines while providing certainty.
• Removing Insurance Subrogation: The report highlights that insurance subrogation represents the largest single source of utility wildfire liability. Eliminating it could reduce total settlement costs by approximately 35% to 40%.

II. Looking Ahead

Moving away from inverse condemnation would not only reshape utility wildfire litigation but also alter how public agencies and private utilities assess risk and fund future projects. We will continue to monitor how the Legislature responds to these and other recommendations found in the CEA report and what it means for California’s legal landscape.

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