On the morning of July 6, 1938, flames engulfed the entire top floor of the Deer Path Inn. One newspaper called it the "worst fire in Lake Forest's history." According to accounts published in the Lake Forester, the “fire started in the kitchen when the second cook spilled grease on the stove and the flames were drawn into the chimney by the suction fan used to carry off kitchen and cooking odors. Starting slowly the fire generated terrific heat and gradually the timbers of the attic caught the blaze. From the east wing, the fire traveled through the main building and around to the west wing, completely gutting the attic. Fire departments of Lake Forest, Fort Sheridan, and Great Lakes labored to halt the flames, but the fire had gained too much headway to be stopped,” even though about "500,000 gallons of water were pumped into the blazing building."

Though falling pieces of slate from the roof endangered firefighters and police, fortunately, none of the first responders, guests or employees were injured, nor anyone from the crowd of nearly 6,000 that gathered to view the spectacle. Dorothy Barker, switchboard operator at the Inn, remained to notify all hotel guests of the fire via telephone before disconnecting her switchboard and leaving the structure.

At the time of the fire, 95 guests and 15 employees were staying at the Inn, including many "elderly couples" who made the hotel their home. Employees and guests and firefighters alike combined forces to salvage furnishings and belongings. One resident, Mrs. Rubee De Lamarter, was hailed as a local hero for rescuing a painting from the ladies’ rest room. 

In the wake of the fire, the headmistress of Ferry Hall, Eloise Tremain, offered the accommodations of the school (vacant during the summer months) to those displaced. John McNichol, superintendent of the Lake Forest Water Department, reported that within three days of the fire three private water mains had blown out, giving way from the added pressure due to the excessive pumping to fight the blaze.

The Inn reopened later that year, in December, following extensive repairs by architect Stanley Anderson which included a new, fireproof gabled third story.

Joseph Emma, proprietor of the Deerpath Theatre, took 200 feet of motion pictures of the fire, which he then submitted to representatives of Universal newsreel. Later that July a screening of the film footage was shown at the Deerpath Theatre for the local viewing public.