Having already paid out billions of dollars in claims related to the Eaton fire, more than 100 insurers have filed lawsuits against Southern California Edison to recoup these costs, alleging the utility’s electrical equipment is the ignition source. Other insurers have made a choice not to sue and have instead sold their subrogation rights.
Executive Summary
Are insurers of wildfires that sell their subrogation rights to third-party investors like hedge funds securing real value for their shareholders, owners and policyholders? Insurance Journalist Russ Banham examines the economics and the implications of carrier decisions to retain or sell subrogation rights. Earlier this year, Banham, a resident of La Cañada Flintridge, wrote about the experience of evacuating from the Eaton fire and preparing his home for the future in the articles, "An Insurance Journalist's Perspective on Southern California's Wildfires" and "Revisiting California's Wildfires: A Personal Journey."Home insurer Hippo is among them. Rick McCathron, Hippo’s CEO and President, said the sale of its subrogation rights in March to an unnamed party was financially beneficial, reducing the insurer’s $42 million in estimated pre-tax losses from the Eaton and Palisades fires by approximately $15 million on a gross basis and $11 million on a net basis. The decision to sell rather than sue, he said, was based on “significant economic damage calculations,” including the time value of money and the utility’s bankruptcy risk, among other factors.
The proceeds from the sale of Hippo’s subrogation claims “compare favorably” with what the insurer would have received by pursuing these claims on its own through the legal system, he said. Cash in hand offers financial certitude, whereas long, drawn out court battles are wearisome and costly, the clock ticking on attorney billable hours. Still, if Hippo’s lawyers decided to go for the jugular in court and Southern California Edison was found at fault for the Eaton fire, the insurer may have collected more cash, money offsetting a greater cost of claims to potentially decrease premiums for policyholders.
