Insurance claims from LA fires could ‘fully exhaust' $21bn state fund
The devastating wildfire in Los Angeles killed 17 people and destroyed more than 9,000 structures in January. One leading theory is that ageing equipment belonging to Southern California Edison, the primary electricity provider in the region, ignited the fire.
If the utility company is found to have been responsible for igniting the devastating January blaze, then the 'financial health of the fund could be strained', according to documents published by California's Catastrophe Response Council, a group of lawmakers and members of the public who oversee the state's wildfire fund.
California lawmakers established the state's $21bn wildfire fund in 2019 in an effort to prevent the state's largest utility companies from declaring bankruptcy if their equipment caused a fire. The fund is made up of money the utility companies contribute and a surcharge on customers' utility bills.
Power lines and other utility equipment are a top cause of wildfires in drought-ridden California – and have sparked some of the state's most devastating blazes including the 2018 Camp fire that killed more than 80 people. Although investigators are still determining the cause of the Eaton fire, the utility company has been under scrutiny since the blaze broke out.
The wildfire fund is overseen by a seven-member council that includes the governor, insurance commissioner, treasurer and secretary for natural resources, members of the public and lawmakers. Before the council's scheduled 24 July meeting, the group published minutes from its 1 May meeting and a draft annual report to the legislature. Those documents suggest that insurance claims from the Eaton fire could drain its resources entirely.
Insured losses for both wildfires that devastated southern California in January – the Eaton and the Palisades fires – range from $20bn to $45bn, according to estimates from financial services companies, such as Moody's and Milliman, and the University of California at Los Angeles Anderson School of Management.
The risk management firm Verisk estimates that insured losses from the Eaton fire alone could reach $15.2bn.
Those estimates have prompted the fund council to warn that, if it is determined that the Eaton fire was sparked by utility equipment, 'the resulting claims may be substantial enough to fully exhaust the Fund'.
The losses could far exceed the fund pending ongoing lawsuits. Dozens of families who lost homes in the Eaton fire have sued Southern California Edison. If investigators determine the blaze was sparked by utility equipment, the state fund would also be responsible for paying any settlements in those lawsuits.
The documents published before the council's meeting include strategies its members are considering in consultation with experts to ensure the financial durability of the fund. The committee also drafted a letter stating that 'they want to make sure most of the Fund is going to wildfire recovery experts and not third-party actors', such as hedge funds or attorneys.
The council documents note that hedge funds are purchasing insurance industry subrogation rights, or the right to the insurance claim, in an attempt to profit from the wildfires. By doing so, hedge funds are agreeing to pay the insurance claim, but would take home any winnings from a legal settlement if Southern California Edison is found liable.
The California Earthquake Authority, which administers the fund under the oversight of the council, also told the Los Angeles Times that it worries attorney fees could shrink the fund further (up to half of settlement amounts can go to legal fees).
Another tactic may include paying out 'only reasonable claims'. In notes to the fund administrator, one council member asks their colleagues to consider requiring utility companies to 'settle claims with diligence' – since the fund, not the utilities, ultimately pay those settlements.
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