Willis Hon, Brad Kuhn Highlight Impact of SB 254

Willis Hon was quoted extensively in the Bloomberg article “Hedge Funds Targeting Fire Insurance Hit a Wall in California.” The article examines how speculation by hedge funds on California wildfire insurance claims will be impacted after the state passed new legislation designed to curtail speculation. The law (SB 254), which was passed last month, voids subrogation claims that alternative investment managers have purchased from insurers unless the utilities targeted were given the option to settle on the same terms.

Commenting on the passage of SB 254, Willis said, “[It] will make it a lot more difficult for hedge funds to execute trades on favorable terms.” He added, “It’s a lot of work finding these funds and developing the deal, drafting the agreement and doing your due diligence. If the electric utility can just step in and exercise the right of first refusal, it makes the whole proposition a lot more risky and uncertain.”

Willis added, “It’s not a given that forcing hedge funds out of the mix will benefit California’s insurance market. There are often negative connotations associated with this profiteering on subrogated claims. But the ability to trade such claims is very important in the insurance market to allow for adequate liquidity.” He closed by saying it looks like lawmakers tried to “strike that sweet spot of discouraging profiteering, while still allowing for liquidity.”

Additionally, Bloomberg also referenced a recent eAlert by Willis and Brad Kuhn, noting that SB 254 has “major implications for alternative investment managers targeting subrogation” and “aside from giving utilities the right to settle, the new law also makes it harder for hedge funds to price subrogation deals by attaching a non-disclosure clause,” which will likely shrink the market for subrogated claims.