Experts to lawmakers: Limits on utility liability may ‘seriously threaten’ CA insurance

California’s insurance commissioner and other experts warn that eliminating the ability of insurers to recover money after utility-caused wildfires could destabilize the state’s fragile market for homeowner coverage.

That message was delivered to legislators who are considering what to do in the face of pressure by power companies that the liability for wildfires caused by their equipment is too large. Subrogation — which allows insurers to recoup money they lost in claims for a utility-caused blaze — is the largest single source of fire liability for power companies.

“We’re in a very shaky, shaky place right now,” said Nancy Watkins, a consulting actuary at Milliman, during a joint hearing Thursday of the Assembly’s insurance and utility committees. “If there were an increase in the cost of risk without insurer confidence in the ability to increase their premiums, that is going to seriously threaten the availability of insurance.”

The hearing is part of a series on the state of utility liability and potential efforts to change the California’s system around it.

They follow frenzied efforts over the summer pushed by Gov. Gavin Newsom to reduce or eliminate subrogation along with other changes. Those talks resulted in a legislative deal that did not include either of his desired options and was ultimately abandoned before it was voted on. Critics labeled Newsom’s effort an industry bailout.

The state currently has a fund to provide financial help for legal costs resulting from fires sparked by utility equipment. But much, if not all, of that reserve could be used to pay for losses stemming from the January 2025 Eaton Fire in Los Angeles County that was caused by an out of service Southern California Edison tower.

The state’s largest utility companies — including Pacific Gas and Electric Co. — are increasingly concerned that not having a strong financial backstop will put them at risk after a future fire and that their credit ratings will also suffer, which will make it more expensive for them to borrow money.

PG&E recently announced that it was delaying $2 billion in planned work after the legislative deal fell through.

Insurance companies, though, have their own concerns. In recent years they have restricted policy sales and not renewed coverage for large numbers of customers due to worries about catastrophic fires.

Insurance Commissioner Ricardo Lara drove regulatory changes in recent years aimed at keeping more companies in the state.

In a letter to legislators ahead of the hearing, Lara said he was concerned changes to subrogation would hurt progress. Adding: “if losses that were previously recoverable from responsible parties remain permanently with insurers, those costs are likely to appear in underwriting decisions, reinsurance costs and premiums.”

Experts at the hearing Thursday agreed that changing the subrogation process could cause issues.

“We’re at that fragile place,” said Michael Wara, a scholar at Stanford University’s Woods Institute for the Environment.

The hearing followed one on Wednesday in which labor, building and utility representatives came with their own warnings about the importance of urgently reducing the liability of power companies. Leuwam Tesfai, executive director of the California Public Utilities Commission, said not doing so leads to a cycle of issues that ultimately will put ratepayers on the hook for more money.

Assemblymember Cottie Petrie-Norris, D-Irvine, who chaired the hearings said Thursday that the goal is not to have a “food fight” between the insurance and utility industries.

But the hearings showed that there are gaps legislators need to bridge to avoid that.

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