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North Bay wineries taking insurers to court over denied smoke taint claims
Wine Industry

North Bay wineries taking insurers to court over denied smoke taint claims

From the Napa Valley Wine Insider Digest: Feb. 14, 2020 series
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Burned hillsides from the Partrick Fire burned up against vineyards in Carneros near Henry Road in 2017. Wineries are battling with insurers who have doled out rejections for smoke taint damage, claiming the damage does not fall under policy.

North Bay wineries have found themselves up against the aftershocks of several turbulent harvests pockmarked by wildfires, this time in the form of smoke taint.

Smoke taint, a phenomenon in which grapes absorb smoke and release it into wine, effectively ruining the product, is at the heart of a series of lawsuits filed by wineries against their respective insurance companies. These insurers, the lawsuits allege, have wrongfully denied wineries’ smoke taint damage claims – in some cases repeatedly.

B Cellars last month filed a lawsuit against various underwriters working with its insurer, Lloyds of London, becoming the latest Napa Valley winery to do so. After discovering some of its 2017 vintage was indeed smoke tainted, the winery filed a claim with its insurance company for the damages, according to the report. Lloyd’s of London ultimately denied the claim.

“(B Cellars) bought insurance, paid premiums, which were not cheap, and then had a loss that was explicitly covered by their policy,” Kevin Block, the winery’s attorney, said. B Cellars is suing for breach of contract and bad faith, he added.

The winery has sustained more than $600,000 in damages, according to the lawsuit, and will seek repayment for its insurance premiums, according to Block.

Though wineries can and do receive coverage for smoke and fire damage, insurers will not cover damage incurred before grapes are harvested. Growers can purchase crop insurance, though that tends to be “limited” in nature, according to Tyler Gerking, chief of insurance recovery practice for and a partner at Farella Braun + Martell LLP. The decidedly un-chronological manifestation of smoke taint further complicates the issue, making it difficult, if not near impossible, to determine when, exactly, the grapes became too tainted by smoke to use, he said.

“Insurance companies might say – ‘Well, you hadn’t harvested before the fires, and we don’t cover damage if it happens on the vine,’” Gerking, who recently penned an article on the topic, said in an interview.

“Wineries might say that the damage occurred later, through the development of the taint itself, which is a long-term process,” he added. “And maybe some damage did occur while grapes were on the vines, but it also happened following the harvest.”

The grapes at the heart of the suit filed by B Cellars – seven tons of them – were harvested from Andy Beckstoffer’s To Kalon Vineyard shortly after wildfires began ravaging Napa County in October of 2017, according to the lawsuit. Smoke taint materialized in four of the seven tons, the lawsuit says – but not until nearly eight months later, in June of 2018. In some cases it can take as long as a year for smoke taint to develop in impacted wines, according to Anita Oberholster, a cooperative extension specialist at the University of California, Davis.

Smoke taint is caused by compounds found in smoke called volatile phenols, which develop in wine made from impacted grapes during the fermentation process, Oberholster explained. Scientists have determined that risk increases with riper grapes -- that fresh smoke poses more of a risk than old smoke -- and that risk of smoke taint rises as grapes spend more time exposed to smoke. But just because there’s smoke, like that produced by the 2017 wine country wildfires, doesn’t mean that grapes will necessarily develop smoke taint, Oberholster said.

“There is so much gray right now, which means no one’s right – but no one’s wrong,” she added.

Even scientists at the forefront of smoke taint research deal with gray areas, according to Oberholster. Researchers currently know about a host of “markers”, or different compounds that, when elevated, indicate a higher risk of smoke taint. But levels of those compounds, which exist naturally in grapes, depend also on grape varietals and the grape’s growing environment, Oberholster said, and outside factors can also skew measurements. (Wine that’s been aged in oak barrels, for example, will show elevated markers of a particular compound tied to smoke taint, even if not impacted.)

Block, the attorney for B Cellars, says he’s not interested in having a conversation about when the damage occurred to the grapes – he’s interested only in the timing of the winery’s loss.

“Under the law, in my view, the insurable loss arises when it first manifests,” he said, referencing what he called “the manifestation of loss” rule. “In this case, that wasn’t until June of 2018, almost eight months after the harvest.”

B Cellars has company in St. Helena’s Levensohn Vineyards, a boutique winery that sued its insurer in May of 2019 for denying a $1.14 million claim. There’s also Amuse Bouche Winery, which lobbed a suit against its insurer in July of 2019 for denying a claim of $1.2 million. Sonoma’s Kunde Family, alongside Vintage Wine Estates (which owns 30 brands including Napa’s Clos Pegase and Girard) filed a joint suit against their respective insurers in fall of 2019 over denied claims for more than $20 million. The lawsuit has since been divided into two separate filings. Litigation for each respective suit is still pending.

“I would expect to see more of this between insurance companies and the insured over the next six to 12 months, because I think wineries are now identifying the problem lots or batches,” Gerking said, adding that he has a number of clients who recently filed insurance claims over smoke tainted grapes and are waiting to hear from insurers. “They’re going to pursue claims more actively.”

Wineries like B Cellars, which contracts with growers for all its grapes, cannot purchase crop insurance. Gerking added that crop insurance is ultimately triggered by a winery’s refusal to purchase grapes from growers – something that can strain grower-vintner relationships, a dynamic Block characterized as “at the center of everything in Napa Valley”. No winery wants to “stiff” its grower, he said, especially if the risk of developing smoke taint isn’t a certain one.

Block, too, said the coming months will bring an uptick in lawsuits like the one filed by B Cellars.

“This particular (insurer) issued a number of policies in the valley to wineries that were impacted by the fires,” he said. “I think you will see more of it – and the first case that gets resolved may be something of a precedent for the others.”

You can reach Sarah Klearman at (707) 256-2213 or sklearman@napanews.com.

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Wine Industry Reporter

Wine industry reporter at the Napa Valley Register.

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