A last obstacle to a proposed $4.04 billion global settlement between thousands of victims of the Lahaina wildfire and defendants including the state of Hawaii, Maui County, Hawaiian Electric Co., Kamehameha Schools and Hawaiian Telcom is scheduled to be addressed Tuesday by Maui Circuit Court Judge Peter Cahill.

Insurance companies remain the lone holdouts to the settlement. They have paid out more than $2 billion in claims so far, and have filed their own suits, known as subrogation claims, for reimbursement. The defendants are accused of negligence in starting the fires or allowing them to spread.

The key question is whether the insurers can go to the front of the line and take their reimbursement from the $4.04 billion settlement, which could leave relatively little for the victims. 

The proposed settlement requires the court to effectively dismiss the insurers’ subrogation suits in order for the settlement to be made final. If that happens, insurers would have to seek reimbursement from the fire victims — effectively putting them in the position of suing their customers. Insurers might end up with little or nothing in such cases.

The pending settlement requires “that this Court enter an order determining that if the Global Settlement becomes effective, subrogation carriers’ exclusive remedy under Hawaii law would be asserting liens against policyholders’ recovery, thereby barring subrogation lienholders from bringing an independent action,” Jesse Creed, one of four designated liaison counsel for fire victims, wrote in a brief for Tuesday’s hearing. 

Vincent Raboteau, an attorney for the insurance companies, did not respond to a request for comment.

Some Insurers Already Have Been Compensated 

While insurance companies say it’s only fair for allegedly negligent parties to reimburse the insurers for claims paid, lawyers say at least some insurers already have been compensated. According to Creed, insurers involved in Maui wildfire matters have sold legal claims totaling hundreds of millions of dollars to Wall Street hedge funds at steep discounts.

Such transactions let insurers get some cash now, while the hedge funds become hidden players in the legal proceedings with the ability to win big if the subrogation suits succeed.

“It’s like this black market,” Creed told Civil Beat. “There’s no transparency.” 

It’s also a replay of what happened on a larger scale after wildfires were started by Pacific Gas & Electric in California in 2017 and 2018, Creed’s brief says. Those fires prompted numerous subrogation claims against the company, which eventually filed for bankruptcy protection. Hedge funds bought billions of dollars of subrogation claims in those cases.

In Hawaii, the victims’ brief points to two such transactions in which funds paid a total of $76.7 million — one for $57.1 million and one for $19.6 million — for subrogation claims. The brief cites announcements of the transaction posted online by Cherokee Acquisition, which brokered the sale of the claims. The announcements do not name the insurer, the hedge fund or the discount paid for the claim.

“It appears based on publicly available information that ‘significant’ insurance carriers have already sold or are in active efforts to sell their subrogation claims to Wall Street hedge funds,” the brief says. “In fact, over $75 million in sales of subrogation claims, representing probably $340 million in subrogation payouts, appears to have been arranged by a single dealer.”

“It’s these Wall Street hedge funds that are betting opportunistically on the ability to recover from the real victims of the fire,” Creed said.

The discount for which claims are sold reflects numerous factors, such as the fact that the insurer is getting cash immediately and that there is risk that the insurer’s subrogation suits will fail. 

The claims, which are essentially debt, are just like any other investment, said Bradley Max, the Cherokee director who helped place the Hawaiian Electric subrogation claims. 

“Sometimes they win, sometimes they lose and sometimes they go sideways,” he said of the deals.

Max likened the idea of selling a subrogation claim to selling stock.

“It’s a straightforward assignment of an obligation,” he said.