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In High Stakes Gamble, the Wall Street Hedge Fund offers to buy claims that the insurer may have against Edison, Southern California, if the utility is determined to be liable for causing a catastrophic Eaton fire in Altadena.
Solicitations are legal, but they are wary of California officials. They dislike the idea of investors who benefit from disasters that have taken 18 lives and destroyed more than 9,400 homes and other structures.
“I think everyone in this room is watching the catastrophe as if what happened in Southern California. Our natural instinct is to say, ‘What can we do to help?’,” Tom Welsh, chief executive of the California Earthquake Department, which manages the state’s wildfire fund, said at a recent public meeting. “In the environment there are other actors who look at that situation in Southern California and instead ask, ‘What can we do to benefit?’ ”
Investors aim to purchase so-called subrogation claims from insurance companies. These are the claims that if the insurance company is determined to have triggered the utility equipment that caused the wildfire that began on January 7th, it will submit it to Edison seeking a refund of the money it paid to the policyholder.
For insurance companies, selling claims – even at a sudden discount – can get at least some refund of the money they pay. For hedge funds that buy claims, it is a gamble where Edison is responsible and can make a big payment if they can cash out much more claims than they paid.
More than $17 billion in insurance claims have been paid to date for the Eton and Palisades fires, according to the California Department of Insurance.
State officials say California has had a potential impact on the state’s wildfire fund and is involved in a fire-related subrogation claim transaction previously reported by Bloomberg.
The fund, which currently holds around $21 billion, will be used to cover most of the costs of the damages claim if Edison is liable to commence Eton Blaze. The cause is still under investigation, but the main theory is that Eaton Canyon’s abolished transmission line was born again, causing the flames, Edison said.
The Wildfire Fund is administered by a state board called the Catastrophe Response Council. At its final meeting in May, Wales told the board that solicitations from New York brokers and investment companies began landing in his email inbox in March.
Oppenheimer & Co is a New York investment company. Ronald Ryder of the company told Wales in an email on April 15 that his company is currently trading delegation claims. Rider writes that there are already 10 deals over $1 billion in the Eton Fire’s recovery rights, similar to the Palisade fire in the Pacific Ocean where the city of Los Angeles faces potential liability.
In another email, Ryder told Wales that investors have bid 47 cents for dollars for claims related to Eton Fire. Regarding the Palisade fire, the bid was five cents in dollars, Rider wrote.
Wales warned the council that “speculative investors” held Eton’s claims and “we’re trying to make a real big profit by demanding a settlement from Edison of 75, 80, 85 cents.”
If that happens, he said, the Wildfire Fund could pay “never millions, if not hundreds of millions of dollars” than if the claim was resolved directly by the insurer.
“It’s really going to have a very negative effect on the durability of the Wildfire Fund,” Wales said.
Oppenheimer declined to comment, and Rider did not respond to the message.
Under state laws of 2019, the state wildfire fund is expected to refund Edison most of the insurance company’s payments to the insurance company if it is found out that the electrical equipment has launched an Eton fire. Palisade fires that occur on territory served by the LA Water and Power Department are not covered by the state fund.
California lawmakers established the Wildfire Fund in 2019 to protect the state’s three largest commercial utilities, Edison, Pacific Gas & Electric and San Diego Gas & Electric, from bankruptcy.
The possibility of a large settlement paid by the Wildfire Fund has led to dozens of cases against Edison, even before the cause of the fire was determined.
If it turns out to be liable for the fire, Edison negotiates with the insurance company, the homeowners and others who filed the lawsuit, saying they were hurt. In that case, the utility will ask the state wildfire fund to cover those amounts.
However, if the insurance company sells claims, the investors who purchased them will enjoy the return. Attorneys handling complex transactions have also been cut, and “generally they have a very high share from the top,” Disaster Council member Paul Rosenstiel said at a meeting last month.
Already, Gov. Gavin Newsom and other state leaders are worried that the $21 billion Wildfire Fund could be exhausted by damage claims from Eaton Fire.
Wales spoke about how hedge funds benefited in 2019 by purchasing insurance companies’ subrogation claims against PG&E on behalf of the insurance company after it was discovered that the transmission line had launched a 2018 camp fire that killed 85 people and destroyed much of the paradise town. Bloomberg reported that hedge fund BowPost Group at the time had made hundreds of millions of dollars by purchasing claims in dollars for 35 cents and then getting more settlements.
To stop hedge funds from making profits based on claims, the Earthquake Bureau said it is currently considering changing its claim management procedures to make the settlement more advantageous for these investors.
According to authorities staff, one change that may be discussed will require a utility that ignites a wildfire to prioritize the resolution of claims from victims and insurance companies who have not sold subrogated rights prior to claims owned by the hedge fund.
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