When Gov. Josh Green announced a $4.037 billion settlement in August for the victims of the Maui wildfires, he hailed it as an unambiguous win.
“Settling a matter like this within a year is unprecedented, and it will be good that our people don’t have to wait to rebuild their lives as long as others have in many places that have suffered similar tragedies,” Green said in a statement at the time.
Three months later, the settlement has not been finalized and no money has been paid out to victims. The lawyers backing the agreement said that an ongoing dispute with insurance companies has jeopardized the settlement.
All parties submitted opening briefs with the Hawaiʻi Supreme Court on Monday, laying out their arguments. Though technical, they boil down to differing interpretations of a key legal concept, called subrogation.
“Subrogation insurers are holding up the entire $4 billion settlement, even though a number of the victims didn't get any insurance money,” said Aaron Creps, an attorney representing fire victims in the lawsuit. “I think there was some hope initially that there could be an amicable resolution — we wouldn't have to resort to going to court, all the way up to the Hawaiʻi Supreme Court — but pretty quickly those hopes faded, and here we are.”
If the court decides the settlement can go through as written, groups including Hawaiian Electric Company, Kamehameha Schools, and the State of Hawaiʻi will each pay between hundreds of millions and over a billion dollars into a settlement fund.
The outcome of this legal battle will have lasting ramifications on Maui’s recovery and the state’s insurance market, said Michael Wara, a senior research scholar at the Stanford Woods Institute for the Environment.
If the court rules in favor of the insurance companies, negotiations for compensating the victims of the fire will go “back to square one,” he said. But if the insurance companies lose, they could raise their rates or even pull out of the market entirely.
“I think there's a ton of risk for Hawaiʻi either way,” Wara said.
What is subrogation?
Under the terms of the global settlement, beneficiaries who accept the settlement money would not be able to sue HECO, Maui County, Kamehameha Schools, or any of the four other defendants who would pay into the fund.
According to a terms sheet filed with Monday’s opening briefs, groups would make payments to the fund — ranging from $9.5 million from West Maui Land Co. to $1.915 billion from HECO. Parties’ contributions to the One ʻOhana Fund would also be counted toward the $4.037 billion total. The One ʻOhana Fund is a separate settlement that will pay families $1.5 million each for the loss of a loved one in the fires. It will also compensate those severely injured.
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The terms of the settlement would also bar the victims’ insurers from subrogating their policyholders’ claims and suing parties like Kamehameha Schools and HECO — a move that the lawyers for the insurance companies disputed.
“What we object to is that there is a term within that proposed settlement that says our clients can't recover a dime,” said Mark Grotefeld, one of the lawyers representing a group of 192 property and casualty insurers in the lawsuit. “That is wrong on so many levels,” he added.
Subrogation is when an insurance company stands in the shoes of its policyholder to recover damages.
Take the example of the 2017 case decided by the Hawaiʻi Supreme Court: a Honolulu driver hit a man riding a moped, seriously injuring him. The man’s health insurance provider covered his medical costs, and then sued the driver who hit him to recover that insurance payout.
This is subrogation in a nutshell: allowing insurers to go after parties responsible for causing damages, and recouping up to the amount that they had paid out to their policyholders.
But each state does subrogation a bit differently, and Hawaiʻi’s law may take into account whether a victim has been “made whole,” or completely compensated for the damage done to them.
In that 2017 case, the driver had settled with the moped rider, and the insurance provider sought to recover their payout from that settlement. Creps, who worked on the case for the moped rider, said that because the man hadn’t been made whole by the settlement, and because his health insurance provider couldn’t point to examples of him being compensated twice for the same damages, the court ruled that the insurance company could not try and recover the costs of the man’s claims via subrogation.
“Here we are arguing that that same decision, the same rationale, the same statute, should be applied to the wildfire disaster — even though in the wildfire disaster, we're dealing with property damage insurance and not health insurance,” Creps said.
The insurance companies in the Maui fires case do not see it that way. For one thing, Grotefeld, one of the insurers’ lawyers, said that subrogation doesn’t exist to prevent a policyholder from being paid twice for the same damages; rather, it is a way to keep insurance premiums low and hold groups accountable when they cause harm.
Parties currently have until mid-December to submit responses to the opening briefs with the Hawaiʻi Supreme Court. The court is tasked with answering three questions about the legal issues at play in the case. After it makes its decision, the case will go back to Maui Circuit Court judge Peter Cahill.
How will the court’s decision affect insurance companies and victims’ families?
Either outcome in the case will shape recovery from the Maui wildfires and the future of insurance in the state.
Lawyers for the insurance companies have argued that a decision barring them from subrogating policyholders’ claims will destabilize the market for property and casualty insurance. Typically, insurers factor in the ability to subrogate claims in the event of a disaster when they calculate premiums.
After large-scale tragedies like wildfires, “oftentimes, the insurers are able to recover some fraction of their losses, and they price that in both to their expected cost of doing business, and also how they think about the future in a state,” said Wara, a Stanford scholar who is not involved in the case.
If insurers win, Creps said the settlement will fall apart for the victims he’s representing. “The defendants — like HECO, and the state and the county, and Kamehameha Schools — they want to know that when they pay money into a settlement pot, they're buying peace,” he said.
Moreover, HECO’s financial stability may be at risk if the insurers can go after the utility: A solar developer already pulled out of three major projects with HECO earlier this month over concerns about the utility’s “financial distress.”
“If the insurers prevail in the case, then there needs to be a new negotiation with the insurers at the table, and that may mean that HECO is insolvent,” Wara said.
If the insurance companies are allowed to sue, Grotefeld said that his insurance clients only want to subrogate policyholders’ claims to go after HECO, Hawaiian Telcom, and Kamehameha Schools. Based on the results of their own investigation, he said the insurance companies believe these three groups “were all actors that proximately caused the fire and the devastation that transpired.”
“We honed our case. We did not sue any government entity. We did not sue the State of Hawaiʻi. We did not sue the County of Maui,” Grotefeld said. He added that at this point, it is “way premature” to speculate about whether HECO could go bankrupt as a result of the litigation.
Wara said he was not surprised that Maui County did not make the insurance companies’ list. HECO, Hawaiian Telcom, and Kamehameha Schools “are the deep pockets” that insurance companies will want to go after as a practical matter, he said. “Kamehameha Schools is the deepest pocket in this case; HECO is probably second,” Wara added.
The insurance companies Grotefeld represents have dispensed nearly $2.4 billion in property insurance payouts to policyholders, and they are on track to pay more than $3 billion in total, he said. There isn’t enough money in the global settlement to pay out both the victims and the insurance companies, Wara said — so until the courts decide the outcome of the case, the proponents of the settlement will maintain that the insurers shouldn’t get a cut.
Still, the legal challenges from the insurance companies are predictable, Wara said. He interacted with many of the same insurers in California in the aftermath of catastrophic wildfires in 2017 and 2018, and said he wasn’t surprised that they filed suit in Hawaiʻi after being excluded from the global settlement. Wara said those at the negotiation tables should have been aware of this outcome, where the settlement now hangs in the balance.
“I hope that the folks at that table understood the risk they were taking,” Wara said.
