The aftermath of last summer’s catastrophic fire in Lahaina, Maui, which claimed 102 lives and decimated the town, was still fresh when discussions began about the complicated task of rebuilding. Fire victims urgently needed assistance, and state officials in Hawaii pushed for swift action to resolve the wave of lawsuits filed against the parties believed to be responsible for the disaster, including the state’s electric utility, the school system, and Maui County.

As the one-year anniversary of the fire approached in August, a settlement was reached: the entities involved would collectively pay $4 billion to settle more than 600 lawsuits, compensating over 10,000 homeowners, businesses, and others affected by the fire. A key goal was also to ensure the continued operation of essential institutions, like the electric utility.

However, achieving a resolution that quickly required an unconventional approach regarding the role of insurance companies in the settlement — an approach that insurers are now contesting. As a result, the future of the payout is now subject to court decisions.

Typically, insurers cover claims and then pursue those responsible for the damages—such as the driver in a car accident—to recover some of their losses. In this case, however, insurers are expected to seek repayment directly from the individuals and businesses they had insured. For instance, a person who received a portion of the $4 billion settlement might also have to pay part of it back to their insurer.

This approach has raised objections from the insurance industry, which argues that it undermines a fundamental aspect of its business model. Insurers have taken the matter to both state and federal courts in an effort to block the deal, causing delays and frustration among fire victims and Hawaiian officials.

Jared Ellias, a bankruptcy law expert at Harvard, expressed some understanding of the state’s desire to expedite the settlement process, noting that achieving justice can often take years. However, he also pointed out that the deal challenges long-established norms in the insurance industry, creating uncertainty for insurers who originally agreed to cover fire victims under specific terms.

Adding complexity to the situation, some insurers have sold their subrogation claims — the legal right to pursue reimbursement from those responsible — to hedge funds specializing in bankruptcy litigation. This has brought in new parties with their own financial interests in opposing the settlement.

The speed with which the settlement was reached stands in stark contrast to other disaster-related legal battles. After wildfires in California between 2015 and 2018, victims waited up to five years before starting to receive compensation for damages caused by electric utilities.

Hawaiian officials emphasized their intent to avoid a prolonged legal battle and to protect key local institutions, including the electric utility, from the fate of bankruptcy filings seen in California. Governor Josh Green described his approach as breaking down the usual barriers in litigation, where everyone acts in their own interest, particularly those who lost loved ones in the fire. He argued that the cooperative strategy, while unusual, was in line with Hawaii’s culture of shared responsibility.

Governor Green also suggested that a portion of the $4 billion settlement could be made available to insurers if they choose to stop challenging the deal.

The heart of the legal disputes surrounding the settlement lies in the causes of the fire, which have been identified in investigations by the state attorney general, Maui County, and the insurance industry. A faulty power line owned by Hawaiian Electric, which reignited the fire near dry brush, was one of the primary triggers, alongside failures by local firefighters and Kamehameha Schools, the landowner, to clear the brush. Two telecommunications companies also contributed by overloading the power pole that snapped.

Despite these findings, all parties involved, including Hawaiian Electric, have expressed support for the settlement, describing it as a way to resolve all claims related to the fires.

The insurance industry, however, argues that it still has the right to sue the responsible entities. Mark Grotefeld, representing 160 insurers in the case, stated that insurers had already paid out over $2 billion and were expected to pay even more. The industry views the settlement’s provision, which prevents insurers from seeking reimbursement, as an unprecedented legal hurdle.

The concept of subrogation — insurers seeking to recover payments made to policyholders by suing those at fault — is critical to the industry’s business model. Insurers argue that without the ability to pursue subrogation claims, they would have to raise premiums, which could prompt them to leave the state altogether.

In addition to legal challenges, some insurers have attempted to recoup a portion of their losses by selling their subrogation claims to hedge funds, with a few deals already in progress.

Governor Green expressed frustration over these financial maneuvers, pointing out how profit motives can overshadow the needs of communities recovering from disasters. He suggested that if people understood how much money was siphoned off for financial gain in the aftermath of such tragedies, they would reconsider working with these insurers.

Some fire victims have also accused insurers of bad faith. Amir Sheikhan, a Lahaina homeowner, received $715,000 from Allstate for his destroyed home but argued that this amount wasn’t sufficient to rebuild. Sheikhan, who expects a larger payout through the settlement, expressed frustration that insurers were still seeking to recover more money, despite having been paid for his policy.

Next month, Hawaii’s Supreme Court will hear arguments on whether the settlement violates state law. While insurers have indicated some willingness to accept a portion of the settlement, a ruling against them would provide the state with leverage to push for more favorable terms.

If insurers withdraw, the state is considering alternative options for businesses and communities to bypass traditional insurance companies. One such option could involve creating “captive” insurers, a practice already used by some large corporations like hotel chains, which would allow local entities to self-insure at a lower cost.