The ashes of last summer’s devastating fire in Lahaina on Maui, which killed 102 people and destroyed the town, were still smoldering when talk turned to how fraught the rebuilding process would be.
Fire victims would need help fast, and Hawaii officials pushed hard for a quick resolution to the avalanche of lawsuits filed against the entities that had caused the fire: the state’s electric utility, a school system and Maui County, among others.
Just days shy of the fire’s one-year anniversary in August, a settlement was announced: Together, those responsible would pay $4 billion to settle more than 600 lawsuits; compensate over 10,000 homeowners, businesses and others; and — critically — keep key institutions, like the utility, solvent.
But getting a deal done that quickly meant adopting an unorthodox approach to the insurance industry’s role in the settlement — one that the industry is challenging. Now, hopes for a timely payout are at the mercy of the courts.
Typically, insurers pay claims and then sue whomever they blame for the damage — like the driver who might have caused a car accident — to recover some of what they paid. In the Lahaina settlement, the insurers are instead expected to seek repayment from the people and businesses they insured. A person who received a share of the $4 billion deal from a pain-and-suffering claim, for example, could have to pay a portion of that to the insurance company.
The industry is balking at this idea, saying it upends a core piece of its business model. Insurers have turned to state and federal courts to try to block the deal, slowing it down and frustrating fire victims and Hawaii leaders.
“I get why they would try to reach this deal,” said Jared Ellias, a professor at Harvard Law School and an expert in bankruptcy law. “Claims are hard — justice can feel years and years away.”
But, he said, “the insurance market does have this basic assumption about how the world is going to work.” The deal “kind of undermines the things they thought they understood when they agreed to insure all of the fire victims originally.”
The insurers have also sold some of their claims to hedge funds that specialize in pursuing cases in bankruptcy court, bringing in another deep-pocketed group with an interest in resisting the settlement.
The speed with which a deal was reached in Hawaii stands out against other post-disaster legal fights. After California wildfires in 2015, 2017 and 2018, people and businesses waited as long as five years before they could start collecting on claims against the electric utility.
Officials in Hawaii say they wanted to avoid a drawn-out fight and protect local institutions, including the state’s electric utility, from having to file for bankruptcy — something that happened in California.
“Normally, because of litigation, everyone puts up walls around themselves because everyone has, appropriately their own interest, especially those who lost someone,” Josh Green, the state’s governor, said. “I just literally knocked down those walls.”
It was a novel strategy, one that Dr. Green said he believed Hawaii’s courts would support. He said that while he understood that insurers from the mainland were trying to recover their losses, the arrangement, which he says calls for more cooperation and less finger-pointing, reflected Hawaii’s culture.
Dr. Green said a portion of the $4 billion settlement could be available to the insurers if they decided to stop fighting the deal.
“We’re all in this together,” he said. “We know who was lost, and we know who’s going to take some responsibility, not necessarily liability — and that was a very important point — but we’re going to take some responsibility, because if not people are going to stay stuck.”
At the heart of the legal battle over the Lahaina settlement are the errors that caused the fire’s destructive spread, which have been identified in investigations by the Hawaii attorney general, Maui County and the insurance industry.
It was caused by a broken power line that Hawaiian Electric, the state’s electric utility, re-energized near dry brush; Maui’s firefighters did not take the time to completely extinguish the fire, so it later reignited; Kamehameha Schools, the owner of the land near the fire’s origin, hadn’t cleared the brush, despite warnings; and two telecommunications companies are alleged to have overloaded the electrical pole that snapped with too much of their own equipment.
Each of those entities, in statements to The New York Times, said it was eager for the settlement to go through.
Last week, they filed a brief to Hawaii’s Supreme Court describing it as “a resolution of all claims arising out of the fires,” adding that the court-ordered mediation process through which it was reached had included the insurers’ lawyers.
But the insurers say they have the right to bring claims against those who caused the fire.
“Insurers have paid to their insureds, as a result of this tragedy, well over $2 billion, and they’re going to be paying a little over $3 billion when all is said and done,” said Mark S. Grotefeld, a lawyer at Grotefeld Hoffmann, a firm with headquarters in Chicago, who is representing most of the roughly 160 insurers involved in the case.
Mr. Grotefeld said the idea that a state law barred insurers from suing the responsible entities directly was one that, after more than 30 years in the industry, he was encountering “for the first time ever.”
The claims — when insurers sue whoever is deemed responsible for damages — are called subrogation claims. The industry says that without them, it would have to charge even higher premiums. If the courts side against them in Hawaii, insurers have threatened to stop doing business in the state.
Some insurers have tried to recover small amounts by selling their subrogation claims to hedge funds that specialize in pursuing such claims in bankruptcy court, though these are small deals.
Bradley Max, a director at Cherokee Acquisition, an investment bank that helps insurers sell claims, said that as of late October there were several deals being negotiated between insurers and potential buyers. Cherokee has brokered two deals worth a total of about $77 million, Mr. Max said.
Dr. Green, the governor, said the hedge fund deals illustrated how financial interests could overtake more pressing factors after a tragedy.
“If America knew how the system normally works, where huge percentages of the dollars go away out of greed after a tragedy, I don’t think anyone would ever want to insure with those parties again,” he said.
Some fire victims have also accused the insurers of acting in bad faith. Amir Sheikhan is among them. He is suing Allstate, which paid him around $715,000 for the policy he had on the 1,400-square-foot house in Lahaina where he lived with his wife, their toddler son and their German shepherd, Lulu, when the fire struck.
“They took care of us right away. They paid us out quickly,” Mr. Sheikhan said.
But the money wasn’t enough to pay for the architect, contractor, materials and labor it would take to rebuild the house. Mr. Sheikhan said that he needed at least $1 million, and that the difference could come from a pain-and-suffering payout he would get as part of the $4 billion settlement.
“We have some relief in sight, and they’re coming to say, ‘Oh, hold on, even though you paid your insurance premium, even though you’re still covered under your policy, we still want something back,’” he said.
Next month, Hawaii’s Supreme Court will hear arguments on the insurers’ position that the deal violates state law.
Though the insurers’ lawyer, Mr. Grotefeld, said they were willing to discuss taking a portion of the $4 billion settlement, a ruling against them would give the state leverage in those talks. Dr. Green, the governor, said Hawaii wouldn’t be obligated to offer them any funds from the settlement, in that case.
If the insurers pull out, the state is considering helping local businesses and community groups find ways to bypass traditional insurance companies. One option for companies is to self-insure through a “captive” insurer they can create for themselves. Some big businesses, like hotel chains, already do this.
“Frankly, it’s a lot cheaper,” Dr. Green said. “A captive insurer would take no profits. It would have tiny margins — just enough to function.”
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