California legislators proposed SB 492 to address victim payouts and utility liability regarding wildfires. The proposed legislation initially included a waiver of subrogation. However, an amended version of California SB 492 and the compromise were considerably better for the subrogation industry than the proposal that preceded it; however, the legislation died. Insurance industry organizations provided opposition to the proposed legislation. Even though the bill did not pass, we note that the current paradigm still contains two significant restrictions affecting subrogation practice, one of which is a direct attorney-fee cap.
The Governor’s earlier proposal would have eliminated or substantially restricted an insurer’s subrogation rights against utilities for wildfire losses. The Legislature rejected that approach. It appears that eliminating subrogation was the principal sticking point and that lawmakers rejected it because of concerns about destabilizing the insurance market and increasing premiums. The August 29 bill therefore preserves an insurer’s substantive right to pursue the utility. The California Special Districts Association likewise reports that SB 492 preserves its requested protection against limitations on subrogation cost recovery.
The current version did impose a 10% attorney-fee cap on insurer subrogation claims. Section 12 of SB 492 would have added California Public Utilities Code § 719.7, which provides:
“Notwithstanding any other law, for any claim based on inverse condemnation against an electrical corporation arising from a covered wildfire caused by an electrical corporation, the fee for an attorney representing an insurer involving a subrogated claim shall not exceed 10 percent of the settlement or judgment.”
That is an unusually direct legislative regulation of the insurer/subrogation counsel fee relationship. Importantly, however, the limitation is not written as a universal California subrogation fee cap. By its terms, it applies where all of these conditions exist:
- the claim is based on inverse condemnation;
- it is against an electrical corporation;
- it arises from a covered wildfire caused by the electrical corporation; and
- the attorney represents an insurer on a subrogated claim.
There was another potentially important restriction: an insurer generally cannot transfer its subrogation right. This provision may actually have broader operational significance for the subrogation industry. Proposed Public Utilities Code § 3299.221(d) provided:
“An insurer shall not transfer the right of subrogation to a third party.”
The statute goes further and expressly prohibits an insurer—or “any legal entity holding a right of subrogation”—from selling or transferring its interest in the subrogation right to a third party.
There are two exceptions:
- acquisition of the entity holding the subrogation right, although the right itself still cannot separately be sold or transferred; and
- a California domestic insurer with annual property-line direct written premiums below $300 million.
That restriction deserves attention from carriers using claim-purchase arrangements, subrogation aggregators, litigation-finance arrangements, or other structures in which wildfire subrogation rights are transferred rather than merely serviced.
It appears that the assignment provision was aimed substantially at private-equity/litigation-finance activity. The surrounding provisions make the legislative target fairly clear. SB 492 prohibits the sale or assignment of wildfire claims to private-equity groups and prohibits the sale, assignment, transfer, or collateralization of contingency-fee interests, subject to specified exceptions. It also prohibits private-equity groups from paying wildfire litigation expenses and certain advertising costs. Subrogation vendors whose contractual relationship with a carrier could be viewed as an assignment should be aware of this type of legislation in the future.
