Insurance Ramifications from State Supreme Court Decision

If there’s one thing you take away from this weekend’s newsletter, it’s this: Property insurance will become an even bigger issue in Hawaii than what we experienced in 2024.

 

The Hawaii State Supreme Court on Monday upheld existing state law prohibiting insurance companies from suing those responsible for the 2023 Lahaina fire.  There’s a lot to unpack, so I will try and simplify things as much as possible.

 

Suppose you own a car, motorcycle, boat, or a house.  You get insurance in case you suffer a loss.  The insurance company is there to pay your claim.  If a tree smashes onto your house, like what I just experienced, the insurance company pays your claim and takes the loss.  After all, that’s the price of offering insurance.  But what if someone driving a car smashes into your house?  Your homeowner’s insurance will pay your claim, then go after the driver’s insurance to reimburse them for the loss.  This process where the insurance company pays your claim, then goes after those responsible, is called subrogation.  It is how insurance works.

 

The State Supreme Court on Monday affirmed a lower court ruling from a few years ago that prohibits subrogation.  In that case, HMSA wanted to sue a driver that hit a moped rider.  The moped rider racked up nearly $340,000 in medical bills.  The driver had $1,000,000 in insurance coverage.  The moped rider asserted that lifetime loss of wages and care would cost $4,000,000.  The two parties settled for $1,000,000, the full extent of the driver’s insurance coverage.  HMSA believed they had the right to go after the driver to recover the expenses they paid.  The court cited state law that prohibits HMSA from subrogation.  If HMSA wanted to get reimbursed, they had to get their cut from the settlement given to their insured, the moped rider.

 

Here’s the really important part of that ruling and state law that will affect the Lahaina settlement:

 

HMSA could only collect from the portion of the settlement that was earmarked for medical bills – the bills HMSA paid out.  Since there weren’t sufficient funds to cover the entire claim, ($4,000,000 plus HMSA’s $340,000) the settlement stipulated that the $1,000,000 was being paid for lost wages and future care only.  HMSA got nothing, nor could they go after the moped rider, because his settlement money didn’t go towards his medical bills.

 

For the Lahaina fire, the insurance companies have paid out, or will pay out, a little over $3-billion in claims.  They were offered $600 Million out of the $4.03 Billion settlement but turned it down.  They believed they had a right to subrogate and sue the parties responsible for the losses they paid claims on.  The State Supreme Court denied their request - telling the insurance companies if they wanted to collect, they’ll have to sue the Lahaina fire victims to recover.  Here’s the wrinkle: It has not been decided how the settlement funds will be classified, nor how much each claimant will get.  If the settlement funds are earmarked for pain & suffering, and loss of life, the insurance companies can’t collect from that pool of money.  If part of the settlement goes towards the physical loss of cars and structures, the insurance companies will be forced to sue those that collect checks to recover.

 

 

The Truth of the Settlement:

 

The one thing everyone agrees on is that $4.03 Billion is significantly lower than the actual liability the fire caused.  The governor and our political leaders pushed a settlement because if the payout was any higher, Hawaiian Electric would supposedly be forced into bankruptcy.  HECO, the State, Kamehameha Schools, Maui County, plus Spectrum and Hawaiian Telcom are all dodging a bullet.  There’s lots of criticism to go around.  Despite attorneys representing 18,000 claims, why such a low figure?  The supporters of the settlement say that victims will get their money faster.  In reality, the governor pushed for the settlement to protect HECO and the other defendants.

 

 

The Long-Term Insurance Impact:

 

We won’t know the full impact of the ruling by the State Supreme Court until a lower court judge on Maui decides how to split up the settlement money.  Since none of the lawyers representing the insurance companies are part of the group helping the judge put together a plan, it is most likely the settlement funds will be designated as payments other than reimbursement for homes, businesses, and cars lost.  That will prevent the insurance companies coming after the fire victims for a portion of what they get.

 

That leaves the insurance companies forking out over $3-Billion and writing it off as a loss.  The insurers and industry experts warn it will result in higher premiums for us all – that means everyone in the state, and not just those on Maui.  Some carriers may decide to leave the state, given the ruling on subrogation.  The governor on Tuesday publicly double-dared the insurance companies to leave.  He presented a statistic that in the last 25 years insurance companies took in $38-Billion in premiums and only paid out $20-Billion.  He believes Hawaii is a cash-cow for these companies.  If that’s the case, he should fire the Insurance Commissioner for letting us get ripped off for the last 3 decades.  I personally don’t think he understands how insurance works.  If you pay out all your premiums, or close to it, you’d get shut down for being insolvent.

 

Make no mistake, every person in Hawaii that pays taxes, insurance, and an electric bill will pay for what happened on August 8, 2023.  It will take a few months for the dust to settle, then start watching for insurance renewal bills.  It won’t be pretty.

 

 

 

 

CFPB Going Away

After the economic collapse of 2008, the Democrats in the US held the Presidency with Barry Obama, and both the US House and US Senate.  In 2010 they collectively put into law The Dodd-Frank Wall Street Reform and Consumer Protection Act.  It was the most sweeping Wall Street reform in history.  Part of the act established the Consumer Financial Protection Bureau.  Its first agency head was Elizabeth Warren, who later whet on to be a US Senator from Massachusetts.

 

The CFPB was given broad powers of enforcement and to regulate any industry in America where a consumer and their money exchanged hands.  The CFPB regulated banks, Wall Street, mortgages, student loans, credit cards, and a whole host of other industries you would not consider part of the “financial world”.

 

I got to hand it to the Democrats on how they set up the funding for the CFPB.  Knowing that in the future they might not be in control of congress, who could gut the CFPB’s budget, the CFPB’s budget bypasses congress altogether.  CFPB receives it funding from the Federal Reserve.  Every quarter, the CFPB Director sends a funding request to the Fed, and the Fed sends them the money.  While you might think this seems weirdly unconstitutional, because the constitution says all funding originates in the House of Representatives, we are both wrong.  The Supreme Court ruled in May 2024 that since congress set up this quirky unconventional funding mechanism, in essence, the funding for the CFPB does originate in the House.

 

Jump forward to 2025.  President Trump vowed to get rid of the CFPB.  He didn’t need to fight with congress.  All he needed to do was appoint a CFPB Director who will not ask for funding.  Without money, the CFPB crumbles.

 

 

 

The good and the bad of the CFPB.

 

 

The Good:

The CFPB has helped reduce fraud and unfair lending practices, while helping increase consumer knowledge.  The CFPB put in place measures that protect consumers from being scammed or rushed into making financial decisions that could take their life’s savings.  They also required mandatory education for people in the mortgage industry.  Funny, after years of continuing education classes, I still know of many in the mortgage industry that are poor at their job.

 

The Bad:

As with any person or entity, unchecked power will ultimately lead to abuse of power.  Because the CFPB really doesn’t answer to any cabinet level secretary, they’ve become overzealous in going after people and organizations.  Also, the CFPB is not the only regulator watching out for consumers.  In mortgage lending alone, we have state regulators, the Federal Trade Commission, the FDIC, the Comptroller of the Currency, and other 3-letter government agencies.

 

I won’t bother everyone reading today with a long story of how the CFPB nearly ruined a three-decade old, community supporting, mortgage company.  But if you would like to read how government can become so detached from their original mission, here’s the link to the story of Townstone Mortgage of Chicago.

 

https://pacificlegal.org/case/cfpb-powergrab-racial-agenda-townstone/

 

 

Here’s my big gripe with the CFPB.  They never really reacted to complaints.  Instead, they felt they needed to unearth issues where no complaints were ever lodged.  As with the linked story of Townstone Mortgage, there was never a complaint, nor any proof the company ever did anything wrong.  Yet in the end, it cost the company millions of dollars to fight a battle they could never win.

 

 

 

 

 

And now the week’s economic news…….

 

Mixed Economic Data

The major economic data released this week revealed some unusually large surprises, but they were in opposite directions. Inflation was significantly higher than expected, while consumer spending fell far short. After these offsetting results, mortgage rates ended the week with little change.

 

The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors look at core CPI, which excludes food and energy. In January, Core CPI was 3.3% higher than a year ago, above the consensus forecast and the highest annual rate since May 2024.

 

Although this annual rate is down significantly from a peak of 6.6% in September 2022, and from 3.9% in January of last year, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Shelter (housing) costs continue to be a primary reason why further progress on bringing down inflation remains challenging. In addition, used car prices, auto insurance, and hospital services posted large increases in January.

 

Another significant inflation indicator released this week, which measures costs for producers, was roughly in line with the expected levels. The January core Producer Price Index (PPI) rose 0.3% from December, matching the consensus forecast. It was 3.6% higher than a year ago, up from 3.5% last month and the highest annual rate since February 2023. Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

 

 

 

 

Consumer spending unexpectedly slowed sharply in January, possibly disrupted by bad weather and California wildfires, or are Americans we running out of credit?  We now collectively owe more consumer debt than at any other period in our history.  The graph has not been updated to reflect January 2025, but we now owe $1.2 Trillion dollars in consumer debt.  Some economists have cautioned for months that at some point our drunken sailor spending spree will come to an abrupt end when our credit cards get maxed-out.  An interesting point to note; the only time we’ve reduced consumer debt has been when the government has dished out bailouts and freebees (2008 economic collapse and 2020-21 covid).

 

In January, retail sales plunged 0.9% from December, far more than the consensus forecast for just a slight decline.  Weakness was seen in autos/parts, online outlets, and sporting goods/hobbies.  The decline this month followed a strong holiday shopping season.

 

 

 

 

 

 

 

Next Week

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy. The detailed minutes from the January 29 Fed meeting will be released on Wednesday. For economic reports, it will be a light week highlighted by the housing sector data. Housing Starts will be released on Wednesday and Existing Home Sales on Friday. Mortgage markets will be closed on Monday for Presidents Day.

 

 

 

Until next week….