Wall Street hedge funds are swooping in to buy possible insurance claims tied to California’s Eaton fire, a move that has rattled state officials and raised ethical concerns about profiting from catastrophes.
The investors are targeting so-called subrogation claims, a process in which an insurance company, after paying a policyholder for a loss, assumes the legal right to seek repayment from the third party responsible for the damage.
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In the Eaton fire case, hedge funds are trying to buy claims and then use the legal rights insurers hold to seek reimbursement from Southern California Edison if the utility is found liable for sparking the January blaze in Altadena. The fire killed 18 people and destroyed more than 9,400 homes and other structures.
Recovering subrogation claims is often expensive and time-consuming, prompting insurers to sell them off in return for immediate cash payments. While the solicitations are legal, they’ve drawn sharp criticism from state leaders.
“I think everyone in this room looks at a catastrophe, like what happened in Southern California, and our natural instincts are to say, ‘What can we do to help?’” said Tom Welsh, CEO of the California Earthquake Authority, which oversees the state’s wildfire fund. “There are other actors … who ask instead, ‘What can I do to profit?’”
Welsh described the actions of the hedge funds as “opportunistic, profit-driven investment speculation,” Bloomberg reported earlier this month.
For insurers, selling the claims, often at deep discounts, allows them to recoup at least some of the billions already paid to policyholders. For hedge funds, it’s a bit riskier. They will be able to make money only if Edison is found liable. But if Edison is found to be at fault, they would hit paydirt.
California officials argue they have a stake in the deals because of the possible effect it has on the state’s wildfire fund, which has about $21 billion in it.
California law requires the state wildfire fund to reimburse Edison for insurers’ payments to policyholders if electrical equipment caused the fire. The wildfire fund was created in 2019 to protect the state’s for-profit utilities, including Edison, from bankruptcy if their equipment starts destructive wildfires. If Edison is found liable, the fund would cover most of the cost of damage claims.
If that happens, it could wipe out the fund and be forced to pay “hundreds of millions, if not billions” more than if the claims were settled directly by investors, the Los Angeles Times reported.
“That would really, very negatively impact the durability of the wildfire fund,” Welsh said.
He added that brokers at Oppenheimer & Co. in New York had emailed him that they were trading 10 subrogation claims worth more than $1 billion in recovery rights.
While changes could be on the horizon for how the fund handles claims in the future, these changes would not apply to the Eaton fire.
During a quarterly earnings call, Southern California Edison said it had engaged in extensive grid hardening and executed a public safety power shutoff prior to the Eaton fire and believed that state regulators would find it had taken reasonable steps to prevent the fire.
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Pedro Pizarro, president and CEO of Edison International, said it could take local authorities more than a year to determine what caused the fire.
There have been online videos circulating showing footage and witness accounts suggesting the fire originated near Southern California Edison equipment.