California’s subrogation shake-up: what it means for wildfire capital

Legislative winds blowing out of California could subtly reshape the way wildfire recoveries are pursued, financed and priced — with potential ripple effects reaching the ILS and reinsurance capital markets.

That was one of the debates at Convergence 2025, taking place 13-15 October, where panellists unpacked the complex interplay between litigation, legislation and investment capital in the evolving wildfire risk landscape.

Gregory Zarin (pictured left), founder and CEO of SubroSmart, warned that new rules on subrogation — the right of insurers to recover losses from at-fault third parties — may alter the legal and financial dynamics behind wildfire claims. “There’s some new measures that have been passed in California and considered elsewhere regarding the transfer and assignment of subrogation rights, sometimes to third parties like hedge funds,” he said.

Subrogation is the legal right of an insurer to recover losses from an at-fault third party, often after paying a policyholder’s claim. In the context of wildfire, it comes into play when a blaze is found to have been caused not purely by natural forces but by negligence — for example, faulty utility infrastructure or inadequate maintenance. Zarin explained: “So much of ILS is centred around catastrophic losses, such as hurricanes and other acts of God. Wildfire and subrogation really go hand in hand because so many of these losses are the result of infrastructure failures from private companies.”

These legislative updates come as capital providers have increasingly participated in wildfire recovery litigation, buying into claims as an alternative asset class. “What has happened over the years is that a lot of insurers would prefer not to be part of that effort — to stay in litigation for that period of time — and there’s been hedge funds and other capital groups that have acquired those claims and then pursue them,” Zarin explained.

The new California law introduces an extra step: if a third party wants to acquire subrogation rights before settlement, they must first offer the potential resolution directly to the at-fault party. “It’s a creative measure,” said Zarin, “to encourage resolution to these matters and to try and level the playing field as far as profiting, or at least the appearance of profiting, from subrogation.”

For investors and reinsurers active in the wildfire market, the law could represent either a stabilising measure or a constraint on capital flows. Zarin believes the practical impact may be limited: “Typically, in a large-scale wildfire loss, who is at-fault is going to be resolved at the same time. Even if the subrogation matters are being sold to third parties, I have not seen that impact the overall strategy or outcomes of the litigation.”

Still, as wildfire exposures become a more material component of US cat portfolios, understanding how recoveries are managed — and who has the rights to them — is increasingly critical for investors. “Our goal is to hold those accountable to prevent future wildfires from occurring,” said Zarin. “It’s very important, if you’re looking at selling or transferring subrogation claims, that it’s done in a way that is compliant — and that you’re aware of any impacts with recent legislation.”

For a market like Bermuda — where ILS investors and reinsurers are probing new frontiers of wildfire risk — these legal nuances underscore a broader truth: capital and litigation are now entwined in the wildfire economy, and regulatory shifts in California may quietly determine how that balance evolves.

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