The California Earthquake Authority is considering reversing condemnation in its new report, SB 254 Nisman LLP

We are closely following the recently released Senate Bill 254 (Baker, 2025) study report, prepared by the California Earthquake Authority (CEA) as administrator of the Wildfire Fund. While the report identifies several paths to stabilizing California’s insurance and energy markets, one of the most important proposals is to recommend radical reform of reverse credit 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 rationale behind this is that because IOU facilities serve public use, the property damage costs resulting from their operations should be generalized to the community and spread among taxpayers. However, as the report notes, this stringent liability standard has created unsustainable financial burdens, driving up energy costs and threatening utilities’ solvency.

A. Option 2.2.1: Remove adverse condemnation

To allocate disaster burdens fairly, the report presents “Option 2.2.1: Eliminate reverse condemnation for wildfires caused by electric and gas utilities.” Specifically, the report recommends proposing and sponsoring a constitutional amendment and accompanying implementing legislation to eliminate the application of inverse condemnation to utility-triggered wildfire damages, rather than returning such claims to a fault-based liability framework (within traditional tort claims such as negligence).

Because inverse condemnation stems from the California Constitution, the report acknowledges that modifying this principle would likely require a constitutional amendment approved by voters. Such an amendment would undoubtedly face fierce litigation, but if successful, it would shift utility liability from potential strict liability to normal tort principles. Instead, plaintiffs will be required to prove negligence. “Moving to a negligence or fault standard would bring California in line with the rest of the country, potentially improving public utility credit ratings, reducing risk premiums on debt and insurance and resulting increased costs to taxpayers,” the report argues. Furthermore, the report notes, “an adverse conviction allows survivors to recover attorney’s fees in addition to compensatory damages; therefore, survivors would have to pay attorney’s fees out of damages if the adverse conviction is overturned.”

for. Option 2.2.2: Damage adjustment

Recognizing that a fault-based standard may not fully prevent utilities from being exposed to bankruptcy, the report also proposes “Option 2.2.2: Modify 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 mitigate the overall scope of public utilities’ exposure to wildfire liability while protecting damages designed to support survivor rebuilding and recovery.” Key recommendations under this option include:

Aligning Damages: Eliminating punitive damages against debt securities to match the protections currently afforded to public utilities. Capping Additional Living Expenses (ALE): Setting limits on ALE liability for high-value properties and standardizing the term to a maximum of five years to account for long rebuilding timelines while providing certainty. Removing Insurance Subrogations: The report highlights that insurance subrogations represent the single largest source of wildfire liability for public utilities. Eliminating it can reduce overall settlement costs by about 35% to 40%.

secondly. Looking forward

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

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