The End of California's Inverse Condemnation Era? Defending Utilities Through the SB 254 Reform Window

For decades, a California electric utility whose equipment ignited a wildfire faced a stark liability rule. Under the doctrine of inverse condemnation, the utility was strictly liable for the resulting property damage, whether or not it acted negligently. A utility that maintained its system prudently and a utility that did not faced the same liability standard once its equipment was found to have started the fire. That doctrine has shaped every major wildfire case in the state and underlies hundreds of pending suits.

For the first time in a generation, that standard is genuinely in play. Senate Bill 254 directed the state to study, and the resulting reports openly propose, fundamental changes to how utility wildfire liability operates, including modification of the strict-liability inverse condemnation framework itself. The reform window is open, and it is time-limited. This paper explains the doctrine, the reform proposals now on the table, and how utility defendants and their subrogating insurers should position current cases and preserve arguments while the liability standard is in flux.

The Strict-Liability Doctrine

Inverse condemnation derives from Article I, Section 19 of the California Constitution, which requires just compensation when private property is taken or damaged for public use. California courts have extended the doctrine to investor-owned utilities on the theory that a utility delivering electricity provides a public use, so that property damaged by utility equipment is damaged in the service of that public use.

The consequence is a liability standard untethered from fault. As the doctrine has been applied, if utility equipment ignites a wildfire, the utility is strictly liable for the property damage the fire causes, and the damages available under an inverse condemnation theory are not subject to the negligence inquiry that governs ordinary tort. The standard has been reflected in the case law for years. See, for example, Barham v. Southern California Edison Co., 74 Cal. App. 4th 744 (1999), and more recently Simple Avo Paradise Ranch, LLC v. Southern California Edison Co., 102 Cal. App. 5th 281 (2024).

The scope of recoverable damages under the doctrine has its own contours. Inverse condemnation recovery is generally limited to property damage. See Pacific Bell v. City of San Diego, 81 Cal. App. 4th 596 (2000). The broader categories of tort damages, including noneconomic and punitive damages, arrive through accompanying negligence and other tort theories rather than through inverse condemnation itself. This distinction matters to the reform proposals, which treat the strict-liability standard and the tort-damages exposure as separate levers.

The SB 254 Reform Reports

Senate Bill 254, signed into law on September 19, 2025, set in motion a formal reassessment of this framework. It directed state bodies to study alternative structures for allocating wildfire risk and to deliver recommendations. Two reports followed, and together they put the strict-liability doctrine squarely on the reform agenda.

The CPUC report. On January 30, 2026, the California Public Utilities Commission released its report, Senate Bill 254 Information and Recommendations. The report describes the existing system in candid terms, observing that a utility whose equipment ignites a wildfire is strictly liable under inverse condemnation for all resulting property damage and is exposed to uncapped tort damages. It recommends reforms that include modifying the utility wildfire liability standard or capping noneconomic and punitive damages, and it questions whether the current approach cost-effectively reduces wildfire risk.

The CEA report. The California Earthquake Authority, as administrator of the state Wildfire Fund, delivered its own report addressing the same questions. It floats a fault-based liability standard as one option, and, recognizing that a fault standard alone might not eliminate bankruptcy-level exposure, a coordinated package of liability reforms as another. Among the specific measures the report describes are eliminating punitive damages against investor-owned utilities to match the protections that publicly owned utilities already enjoy, and capping additional living expenses for high-value properties with a standardized maximum duration.

Read together, the reports propose to move California from a no-fault strict-liability regime toward something closer to a fault-based or damage-limited model. The proposals are recommendations, not law, and any move away from constitutionally grounded inverse condemnation would likely require a constitutional amendment and would be intensely litigated. But the direction of the official analysis is unmistakable, and it favors a reexamination of the standard that has defined utility wildfire liability.

Positioning Pending Cases During the Reform Window

The central strategic challenge for a utility defendant is temporal. Hundreds of cases are pending under the current strict-liability standard, even as the official reports propose to change that standard. A defendant cannot wait for reform to litigate today's cases, but it can make decisions now that preserve the benefit of any reform that arrives. The following considerations frame that approach.

Separate the strict-liability exposure from the tort exposure. The reform proposals treat inverse condemnation strict liability, punitive damages, and noneconomic damages as distinct levers. A defendant's case strategy should mirror that separation, defending the property-damage liability on inverse condemnation grounds while contesting the negligence-based and punitive theories on their own terms. The categories may be reformed independently, and a case posture that already distinguishes them is positioned to capture any partial reform.

Preserve constitutional and standard-of-liability arguments. Where the application of inverse condemnation to a particular utility or a particular fire is contestable, those arguments should be raised and preserved rather than conceded. The doctrine's extension to investor-owned utilities rests on judicial reasoning that reform proposals are now openly questioning. Preserving the standard-of-liability challenge keeps a defendant aligned with the direction of the reform debate and protects the issue for appeal.

Coordinate timing and settlement against the reform calendar. The value of a claim looks different depending on whether the liability standard holds or changes. A defendant evaluating resolution should weigh the reform trajectory in its analysis, recognizing that the strict-liability regime under which a demand is calculated is itself under review. Our class action and MDL teams coordinate the defense of large wildfire dockets so that timing, common-issue strategy, and resolution decisions account for the legislative landscape rather than treating the current standard as fixed.

The Subrogation Dimension

Inverse condemnation reform does not affect only the utility defendant. It directly affects the insurers subrogated to the property claims they have paid. Because inverse condemnation recovery centers on property damage, subrogating insurers are among the most significant claimants in wildfire litigation, and a change to the strict-liability standard would reshape the value and theory of their recovery.

For a subrogating carrier, the reform window cuts in a complex direction. A move to a fault-based standard would make property-damage recovery contingent on proof of utility negligence, raising the evidentiary burden on claims that today proceed on strict liability. Carriers positioning subrogation recoveries should account for that possibility in how they value and time their claims. The interplay between the utility defense and the subrogation claim is one our wildfire and insurance recovery teams analyze together, because the same doctrinal shift moves both sides of the ledger.

Preserving Arguments for the Appellate Stage

Whatever shape reform takes, the boundary between the old standard and the new will be litigated, and much of that litigation will play out on appeal. Questions of retroactivity, of how a constitutional amendment or statutory cap applies to pending cases, and of the continued vitality of the judicial reasoning extending inverse condemnation to investor-owned utilities are all appellate questions in the making.

A defendant should build the trial record with those appellate questions in view. Our appellate practice works alongside trial teams to frame and preserve the standard-of-liability and constitutional issues, so that a utility is positioned to benefit from favorable appellate development as the reform debate resolves. An argument preserved now is an argument available when the law settles.

Conclusion

California's strict-liability inverse condemnation doctrine has defined utility wildfire liability for decades, and for the first time the state's own analysis openly proposes to change it. The SB 254 reports do not alter the law as it stands, and pending cases must still be litigated under the strict-liability standard. But the reports establish that the standard is genuinely contestable, and they map the specific reforms, a fault-based standard, punitive-damage harmonization, and damage caps, that may follow. The utility defendants and subrogating insurers best positioned are those who litigate today's cases with tomorrow's standard in view: separating the liability categories the reforms treat separately, preserving the constitutional and standard-of-liability arguments the reports have now legitimized, and building a record ready for the appellate questions that reform will inevitably generate.