One year later, how fire-damaged small businesses rebuilt when insurance failed them

It has been one year since the Palisades Fire devastated Southern California, completely altering the housing and business ecosystem in the region. 

Processing Content

In addition to being one of the costliest disasters in the history of our nation, this crisis was compounded by a weak and ineffective insurance market. Mere weeks before the fire sparked, seven out of the state’s 12 primary insurers restricted fire coverage in this area — a decision which left one in 10 Los Angeles homes uninsured.  

From a tax and accounting perspective, this coverage gap created immediate downstream consequences for the small businesses that call Los Angeles home. Without the proper insurance proceeds to offset casualty losses, many business owners were forced to navigate complex tax treatments of unreimbursed losses under Section 165 while also managing liquidity constraints, further placing strain on their balance sheets and disrupting their normal accounting practices.  

Following this devastation, California leadership vowed to expedite the rebuilding process — but without insurance, homeowners and small business owners were left footing the bill. So where are we now, one year later? Approximately 13,000 homes and 2,600 small businesses were destroyed in the fire, and one year later, fewer than a dozen homes have been rebuilt in Los Angeles County. This slow rebuilding process is introducing additional accounting challenges. The extended recovery timelines complicate asset impairment analyses, business interruption calculations, and revenue recognition for companies unable to resume normal operations. This places pressure on the CPAs as they model long recovery scenarios and reassess future financial forecasts in the absence of predictable insurance reimbursements.  

While the fire may not have been avoided, the preparation and fiscal response could have been planned for. The insurance crisis was underway before the first sparks of this fire ignited, but the devastation placed additional strain on the mainstream market. While many small businesses lost insurance (either due to unaffordability or straight-up cancellation by their providers), others found support through self-insurance alternatives — most notably through the implementation of micro-captive insurance plans.  

Micro-captive insurance is a self-insurance option made available to small businesses through Section 831(b) of the Internal Revenue Code. By setting aside pre-tax dollars into micro-captive insurance plans, small businesses are granted the same flexibility and comprehensive risk management capabilities that have been leveraged by their Fortune 500 counterparts for decades. Under Section 831(b), qualifying captive insurance companies can elect to be taxed only on investment income rather than on underwriting income, provided premium thresholds and regulatory requirements are met. This tax election creates a valuable planning tool for small businesses, especially in today’s uncertain markets.  

While these plans cover physical loss accrued by destruction, the same as any other mainstream insurance plan, they also have the added benefit of covering other fortuitous risk options that otherwise may not be covered by traditional insurance plans. Items like supply chain disruptions, closure due to evacuation and risks associated with political and policy changes are also covered by these plans, and many small businesses in Southern California benefited from them in the aftermath of the fires. By implementing these plans, small business owners were able to continue covering payroll expenses during the closures caused by evacuation — supporting their employees when they needed the support the most.  

The micro-captive insurance plans are providing these small businesses the ability to rebuild their businesses more quickly while securing jobs for them and their employees much sooner than waiting for the government’s response. This is good for everyone, and exactly what our government should want: citizens taking initiative to rebuild immediately by providing tools beforehand to mitigate potential future risk, strengthening the local and national economies as a result.  

The more small business owners are aware this tool exists, learn how to properly implement it, and successfully insure their own assets and operation, the stronger the greater insurance market will become as a result. Not only will these plans increase coverage for the businesses who need it most, but the decrease in pressure on mainstream insurers will ensure coverage plans can once again be affordable and accessible.  

As policymakers and regulators evaluate the future of the insurance market, the accounting community must be a part of the conversation. Clear and consistent guidance around the tax treatment and compliance of micro-captives will be essential to ensuring these tools are used responsibly. When structured correctly, these plans open the door to the necessary evolution in how small businesses can manage risk in an increasingly uncertain environment. It is paramount that policy makers and members of the IRS work to increase access to insurance coverage, not limit access to alternatives. Maybe then, when the next natural disaster inevitably hits, small businesses will be better prepared.