Senator Taylor calls for special session to address windstorm risk

Posted on May 17, 2013 by Seth Chandler

Texas State Senator Larry Taylor

In the wake of the death of his bill that would have substantially reformed windstorm insurance along the Texas Gulf Coast, Texas State Senator Larry Taylor is calling on Texas Governor Rick Perry to put windstorm insurance on the agenda for a special session of the Texas legislature this summer. Since there are indications that Governor Perry may call a special session to address other issues such as redistricting, guns on college campuses, and, possibly, the little matter of the budget, the question is whether Governor Perry would add windstorm reform to the agenda.

Here’s why a special session matters. In a special session, there is no “blocker bill.” This is a provision in the Texas Senate that makes it difficult/impossible for a bill to get to the floor during a regular session unless it has 2/3 support. Thus, the votes that apparently were sufficient to block Senator Taylor from getting his S.B. 1700 before the legislature during this session, will likely not be enough to prevent it from making it to a vote in a special session. It is still the case, however, that to take effect immediately — as opposed to sometime late in the 2013 hurricane season — whatever legislation is approved will need a 2/3 vote from both chambers.

I agree with Senator Taylor that Governor Perry should place the issue of windstorm reform before a special session of the Texas legislature.

Having applauded Senator Taylor for recognizing a serious threat to his constituents from existing law, let me make clear that Senator Taylor and I do not agree on the merits of his particular bill, S.B. 1700. Although I acknowledge that the status quo is so bad that even a bad bill might be an improvement, there is much to dislike in S.B. 1700. And so, if he gets his way, I am likely to continue to urge that S.B. 1700 be scrapped in favor of better ideas or substantially modified.

Senator Taylor and I also do not agree, I think, on the magnitude of the financial problems facing TWIA. He ended his press release with the breezy assurance that he felt confident that losses from future storms will be covered. That is kind of a strange statement from someone simultaneously saying we need a special session of the legislature to deal with an urgent problem. If losses will be paid, what is the rush? And so, while I understand fully the importance of a prominent elected official not generated unwarranted panic in policyholders, there is a countervailing interest in being truthful about the risks that exist here. There’s an even stronger interest in reducing those risks if possible.

For the reasons I have set forth on this blog over the past few months, I believe the TWIA situation, is far worse than Senator Taylor asserts in his press release, closer to what would justify Senator Taylor in calling for a special session of the legislature and, actually, far worse than he and many others may realize. The legal structure on which TWIA would rely to recapitalize itself following a major storm and which would be needed to pay claims even somewhat promptly is, as TWIA itself acknowledged in a plea for reform legislation, extremely fragile.

There is a substantial risk that TWIA would not be able to raise more than $1 billion in post-event bonds and cash on hand to pay claims in a storm this summer; and the risk of a $1 billion in losses this summer is between 5 and 7%. If we take three summers as the relevant time period — because that’s when a bill from the 84th legislature might well take effect — we are talking about a risk of 14-19% of having blue roofs on the coast and no money to do repairs. One way to think about this is that we are, quite literally, playing Russian Roulette with the Texas economy for the next few years. The odds are about the same: 1 in 6.

The status quo creates too high a risk of a human-engineered disaster along the Texas coast and, derivatively, for the Texas economy.

Bottom Line

There are, as I have pointed out, modifications of S.B. 1700 that could make it a bandaid for Texas for the next two years. That would be an OK idea. There are, as I have noted, alternative schemes such as an assigned risk plan that provided adequate returns to insurers that would be a more promising structural solution for the long run. What Governor Perry I hope becomes immediately educated about by legislators up and down the State of Texas, however, is the disaster looming if a major storm hits before the next legislative session and the insurer that covers 62% of all property there doesn’t even have close to enough money to pay for windstorm losses. Governor Perry should be motivated to take those lessons seriously if he wants to remain a popular figure in Texas or elsewhere in the United States. And those legislators should be mighty motivated to plea because voters will otherwise look to them as the people that failed to act and left the Texas coastal economy in shambles when they knew of a clear and present danger.

Texas Insurance Commissioner Eleanor Kitzman Confirmation in Doubt

Posted on May 17, 2013 by Seth Chandler

Eleanor Kitzman

Serious doubt exists today as to whether Texas Insurance Commissioner Eleanor Kitzman will be confirmed by the Texas Senate. Her name does not appear on the list of nominees set for confirmation today and today appears to be the last day on which this committee will meet. If so, and if, as I suspect, this is a response to her actions regarding windstorm insurance in Texas, this is a major loss for Texas. I would urge the legislature to reverse course. I would urge Governor Rick Perry and other leaders to speak up and support their choice.

But before voting to confirm someone with years of experience in insurance regulation and regarded highly enough nationally to head the critical Financial Regulations Standards and Accreditation Committee of the National Association of Insurance Commissioners (NAIC), legislators should at least examine the alleged marks against her.

The Rap Sheet

Count 1: Aggravated truth Telling

On or about June of 2012, Commissioner Eleanor Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit. This utterance challenged the prevailing wisdom that everything was fine with TWIA. It challenged the cultivated illusion that investors could regard collateral or property insured by TWIA as having the same degree of security as property and collateral insured by other Texas insurers. It threatened growth on the coast.

For this heresy, Commissioner Kitzman was welcomed back to Texas by Representative J.M. Lozano, R-Kingsville, with a request that she be investigated byTexas Attorney General Greg Abbott for breaking Texas law. And what law might it be that criminalizes speaking the truth? Lozano said her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane. Needless to say, the investigation requested by Representative Lozano, if one was ever done by our more level headed attorney general, went absolutely nowhere because Kitzman’s speech had violated no law and done no wrong.

Commissioner Kitzman compounded this alleged wrongdoing by then saying in her response to Chairman Smithee that, if TWIA did become insolvent, the state of Texas was under no legal obligation to make up for the resulting unpaid claims of TWIA policyholders. Never mind the fact that absolutely no one has cited any legal authority saying that Texas has an obligation to pay such debts any more than obligations to guarantee other unpaid obligations throughout the state. Never mind the fact that the Texas Property and Casualty Insurance Guaranty Association statute makes clear that it does not provide protection — at all — for government-created insurers. Never mind that Commissioner Kitzman is an experienced attorney and expert in insurance regulation who can read as well as anyone else and find no law creating such an obligation on the part of the State of Texas. Never mind, even, when I tell you as a professor of insurance law at a respected university that there is no such legal obligation. Commissioner Kitzman again disrupted the illusion that it was no more risky to invest on the coast of Texas than it might be to invest in El Paso or Dallas or San Antonio. And that, in certain parts of Texas, is apparently a crime or, if not, the basis for refusing to confirm an otherwise eminently qualified individual for a critical regulatory post.

But, of course, it goes beyond daring to question the assumption of security along the Texas coast or doing so just one time.

Count 2: Threatening A Trial Lawyer with reduction of fees

On or about March of 2013, Commissioner Kitzman asked the TWIA board to consider placing TWIA in receivership, the Texas equivalent of bankruptcy, following its filing of an annual report that showed that it was insolvent. Let us make clear what the consequences of such an act might be.

TWIA has been a boon to trial lawyers along the Gulf Coast. In part because of extremely dubious adjusting practices by the Windstorm Association and, perhaps in part for other reasons, attorneys along the Texas coast have made hundreds of millions of dollars on contingency fees arising out of breach of contract, bad faith and statutory claims against TWIA. I am not, please note, saying there is anything wrong with this. Insurers do on occasion misbehave, perhaps particularly so, when they have not been properly capitalized. There need to be deterrents against exploitation of policyholders and there is nothing wrong with lawyers advocating zealously on behalf of their clients. And, in the interests of full disclosure, I worked at one time as an expert on behalf of one of those very plaintiffs firms evaluating what appeared to me to be inappropriate use of statistical evidence by TWIA in adjusting claims.

The key point, however, is that there are still a number of Ike claims pending. In receivership, those claims might not be paid in full. They would have to be treated with at least some regard to future claims against an insolvent insurer. But, if those claims were not paid in full, not only would the claimants perhaps not receive perfect justice but the attorneys representing those claimants would likely suffer a commensurate reduction in their percentage interests (contingency fees) in the lawsuits. Both of those possibilities — a threat to people one has come to care about and a loss to one’s own pocketbook in the process — can make good people mad. And when those people also make hefty contributions to political campaigns, that’s almost a crime in Texas.

Moreover, consider the threat to the illusion of security compounded by going public with the idea that TWIA was insolvent, that future claimants might need to be treated fairly, and that TWIA might need to be placed into receivership. Other Commissioners might have swept that issue under the rug or concocted ways to extract more money out of inland Texans to pay for future claims. But not Commissioner Kitzman. By even uttering the word “receivership,” she compounded her earlier threat to the cultivated illusion of security that has fueled the addiction to continued development along the vulnerable Texas coast. Never mind that receivership might actually help TWIA recapitalize itself — indeed that is a major purpose of receivership — the public confirmation of TWIA’s desperate straits might make other lenders reluctant to lend and developers reluctant to develop on the strength of a TWIA policy.

Plea for Relief

There are, of course, other issues with Commissioner Kitzman’s tenure. Her views on balance billing rules in health insurance have stirred up controversy. And, because to my knowledge no public hearings were ever held on her appointment, we don’t know if there are issues pertaining to managerial competence or other matters. This is not a full accounting of her pros and cons.

From what I can see, however, Commissioner Kitzman has been an open and fair individual — yes one with a free market bent that one would have thought might have sold well in Texas. She participated in creative efforts that did not constitute toadying to powerful private insurers to deconcentrate the risk now held in TWIA and get those insurers to start shouldering some of the windstorm risk but at fair prices. She’s presided over the growth in an outstanding web site that provides excellent information to consumers. She has been generous with her time to me, appearing in my insurance law class this fall to speak forthrightly with students. She’s been a leading figure nationally in insurance regulation.

I hope the Texas Senate somehow changes course and confirms her. If not, I hope Governor Rick Perry figures out a way the State of Texas can continue to benefit from her expertise. And, above all, I hope that legislators realize that shooting the messenger does nothing to protect the Texas coast or attract talent to critical fields in our state.

S.B. 1700 dead; Texas coast in grave danger

Posted on May 15, 2013 by Seth Chandler

Senator Larry Taylor, sponsor of S.B. 1700, the only significant bill on windstorm reform to get through a legislative committee and at least have the chance of being approved, announced this evening that his efforts to get his bill passed have been frustrated by the Texas Trial Lawyers’ Association and the attorney with the largest share of the Ike cases, Steve Mostyn. I did not agree with much in S.B. 1700. It had many problems. But if this means that there will be no reform this legislative session of dysfunctional Texas insurance against tropical cyclones, I agree very much with Senator Taylor that this is a sad day indeed.

Here’s a copy of his press release.

Larry Taylor press release

There will be time in the next few days to discuss why certain trial lawyers may have objected to the bill but, from my perspective, the important is not whether the trial lawyers have a legitimate concern or whether, indeed, their objections are the only cause of the bill’s defeat. Why, for example, did Steve Mostyn oppose it if the offensive provision had been removed? In some sense, however, this really doesn’t matter. The important issue is what on earth is Texas going to do about hurricane insurance until the 84th legislature two hurricane seasons from now.

Miracles?

There is, I suppose, a remote chance that the House could pass some minimalist bill that fixed the worst parts of the current scheme and try to ram it through the Senate. I sure hope that happens. But I am not certain that there is the requisite level of support for such a scheme nor am I sure that there is time. I do recall Representative John Smithee, chair of the House Insurance Committee, saying at a hearing that he did have a bill filed that had little content but that could be used as kind of an all purpose vehicle for TWIA reform. But, again, I have doubts that there is the will or the time to get something passed before the end of the regular session.

There is also, I suppose, the possibility that Governor Rick Perry would add windstorm finance to a special legislative session. But I have heard no rumor that such is contemplated. And there is, I suppose, the possibility, that Texas is just counting on using its rainy day fund to pay for what could be a very rainy day on the coast of Texas this summer or next. But I do not know whether such a use would be countenanced by the political powers or, since this is partly a self-inflicted wound, whether it should be used in that fashion.

What now?

And so, to my amazement, Texas is apparently choosing to to face the 2013 hurricane season — and perhaps the 2014 hurricane season too – with 62% of the property on the coast insured against tropical cyclones by an insurer that has been called insolvent by the Texas Insurance Commissioner, Eleanor Kitzman. The insurer has at in its Catastrophe Reserve Trust Fund at best 1/20th of the amount it should have if it wants to self-fund claims and has very doubtful ability to recapitalize itself in a significant way using post-event bonds.

As I told Fox TV today in a part that didn’t make the air this means two things for people on the coast. (1) People with insurance from the Texas Windstorm Insurance Association need to shop very aggressively for alternative forms of windstorm insurance. They can’t just go to Allstate and State Farm and the usual suspects There are many insurers in Texas. Many won’t write on the coast. But maybe some of them will. Even if it costs more, it may well be worth the peace of mind if and when a storm brews in the Gulf of Mexico this summer. (2) People and businesses with TWIA policies should behave as if their policies have upwards of 30% coinsurance. That means taking every imaginable step both now to get their properties as resistant to hurricane damage as possible and to take every last minute precaution to reduce loss if a storm comes.

For my part, I’m going to keep watch on the extent to which TWIA succeeds in increasing its capitalization through a Bond Anticipation Note and through reinsurance. I’ll try to dig further into the ability of TWIA to sell post-event bonds. And I’ll keep watch to see if any legislative cavalry is coming over the hill. Right now, however, all is very silent in this calm before the storm.

Senator Taylor: S.B. 1700 dead

Posted on May 15, 2013 by Seth Chandler

A press release issued by Senator Larry Taylor this evening reports with great frustration that S.B. 1700 has been killed off. The cause of death has nothing to do with the issues previously discussed on this blog. Instead, the fatal blow has come from trial lawyers, who do not like provisions in the bill that would make it harder for Ike claimants and future claimants to recover large damages.

We will blog more on this later this evening, but you heard it here first. This death has immense significance for Texans both on and off the coast.

Fox 26 Understands the Issue, the Houston Chronicle does not

Posted on May 15, 2013 by Seth Chandler

Fox 26 in Houston will be airing a story tonight on the problems that will result from failure to develop (thus far) a sensible bill reforming TWIA that has broad political support. I’ll be in it. The story is particularly timely in that today’s failure of the legislature to address the only bill to emerge from a committee on the subject, S.B. 1700, is further evidence that time is running out.

And, might this be the time to criticize the Houston Chronicle and make yet more people annoyed with me? Perhaps so. You can believe me on this issue, you can believe coastal legislators, or you can believe whom you want about the merits of various reform efforts, but everyone who has bothered to look understands that the financial troubles — some would call it insolvency — of the largest insurer on the Texas coast — right as hurricane season begins — is a pretty major issue. It affects tens of thousands of people in the Chronicle’s circulation area as well as hundreds of businesses and government bodies along the coast. And, if what I am saying is right — which might just possibly be the case — the insolvency of TWIA following a significant storm this summer is going to affect every single person in Harris and surrounding counties. Indeed, on this issue, I suspect, some legislators who don’t like my reform ideas very much would probably agree.

And what coverage has the Houston Chronicle offered on this issue? Nada. Zilch. Less than the Corpus Christi Caller with its far more limited resources. Less than even the Galveston Daily News. I know newspapers are really struggling right now and actually covering political news is a challenge, but I look at the Chron.com website right now and I see fascinating reports of a Fort Bend teenager bagging a large alligator, a story on the failure of an excellent restaurant to open in the Heights, and some local crime stories, but nothing on this issue. And it’s not just this way today. There has been silence from the Chronicle for the whole legislative session. If a local TV station can cover this story competently, so too can Houston’s major daily.

P.S. For newer readers of this blog, please do not take my difficulties with the failure of the Senate to take up S.B. 1700 as support for that bill. For reasons discussed elsewhere, I have serious problems with the bill. My point is that the status quo is a disaster waiting to happen. A seriously amended S.B. 1700 could become the framework for a two-year patch up of TWIA. But if things don’t happen really soon, there will be no opportunity to get a bill through both houses of the Texas legislature, let alone one that could be in place before September 1, 2013.

Texas Senate Watch — Day 3

Posted on May 15, 2013 by Seth Chandler

We’ll see if S.B. 1700 can make it a vote in the Texas Senate today. The past two days of failure in that regard suggest its sponsors do not yet have the votes. Perhaps with some substantial floor amendments, it might make it today. I’ll be watching as best I can but, since I suspect most of the action will take place behind closed doors and the Senate proceedings will be but a quick ratification of what has been worked out in private, no guarantees I will be watching at exactly the right moment. Corpus Christi Caller report Rick Spruill @Caller_Rick is also watching today, so that’s an alternative source of news.

Or, of course, you can just watch the proceedings yourself here.

Note: Timestamps on the post are off by one hour either due to a bug in WordPress or a lack of understanding on my part about how to set some option. Sorry.

15.00

So, nothing happened on windstorm insurance on the floor of the Texas Senate today. The one thing perhaps everyone could agree on is that time is running out to change anything in this regular session of the 83rd Legislature.

12.40

They are recessing until 2:15. The Senate Business and Commerce meeting will have a meeting at Chairman Carona’s desk during the recess. I have no idea what they will discuss.

Unfortunately, my day job is likely to prevent me from keeping even half an eye on the Senate for the next several hours, so you are all on your own for a bit.

12.20

Might be oyster and shrimp lunch time because nothing has happened on the Senate floor for quite some time. Oh, wait. They just started up again. But they are just reading and referring House bills to Senate committees.

11.58

Senate back considering bills, but not (yet) S.B. 1700. The current one, on toll road conversion, is generating some actual comment.

11.31

They are into announcements rather than bill consideration. But the chair indicates there may be additional bills to be heard today.

11.20

Senator Royce West certainly gets his colleagues’ attention by saying he was adding billion to the cost of a bill on digitizing filings in civil lawsuits. Just kidding.

10.51

Senator Larry Taylor, sponsor of SB 1700, is now speaking, but not on Windstorm Insurance. Instead, he is talking about CSSB 1560 involving easements.

10.49

Chair says, “Members, that concludes the morning call.” Looks as if they are now taking up substantive bills.

10.40

Oyster and shrimp lunch for legislators being discussed. No Windstorm bill yet.

Fixing TWIA for this hurricane season will require a two-thirds vote

Posted on May 14, 2013 by Seth Chandler

Section 39 of Article III of the Texas Constitution reads as follows:

Sec. 39. TIME OF TAKING EFFECT OF LAWS; EMERGENCIES; ENTRY ON JOURNAL. No law passed by the Legislature, except the general appropriation act, shall take effect or go into force until ninety days after the adjournment of the session at which it was enacted, unless the Legislature shall, by a vote of two-thirds of all the members elected to each House, otherwise direct; said vote to be taken by yeas and nays, and entered upon the journals.

This constitutional provision, which the legislature can not change, means that unless a windstorm bill is passed that is acceptable to two thirds of both houses, it will not take effect until about September 1, 2013, well into hurricane season. And that means even if a bill is passed — but passed by less than the constitutionally required super-majority — all that stands between the weather and a major problem in Texas between now and September could well be less than $1 billion. If so, Texas runs the serious risk of an insolvent insurer that covers 62% of the exposure for real property — residences, businesses, government facilities — unable to pay claims. Without making things too scary, it might not be able to pay even 50% of clams.

This means two things.

Thing 1) All sides of this debate need to have some flexibility and take very seriously their obligations as legislators. If there is deadlock, or even if there is simply less than a super-majority in favor of one bill, legislators might consider lowering the stakes. If you can’t get a really good bill — and I fear that is probably where we are right now — put something in place that people can be confident will not be etched in stone. I would suggest that either of the two alternative “minmalist, last-minute fixes” I proposed this month qualify. But there are alternatives that might also suffice.

Thing 2) If no bill passes or a bill passes without two-thirds support, we need to turn urgent attention to what is actually going on in TWIA. It is attempting to obtain a pre-event “Bond Anticipation Note” so that they would at least have about $700 million with which to pay claims on their $70 billion plus of total exposure. Without that, we are down to a Catastrophe Reserve Fund that stands at $180 million and possibly less in light of both continuing Ike litigation and some severe storms this past month. We also need to pay heightened attention to TWIA’s efforts to obtain reinsurance — and the terms of that reinsurance. The details matter here. Where will the reinsurance attach? Will it leave a gap? Does the reinsurance cover one storm (occurrence) or does it permit “reinstatement” — an ability to cover multiple storms, although possibly for an additional premium. And how much will an over-a-barrel TWIA have to pay to the reinsurance industry, which has historically charged prices of five times the expected value of risk assumed, under these circumstances? Every dollar spent is one less dollar available for succeeding years.

So, high stakes in the days ahead. We’ll keep a watch out and I urge you to make sure your legislators understand the importance of the issues here both for the Texas coast and in the rest of the state.

Live Blog of Texas Senate session of May 14, 2013

Posted on May 14, 2013 by Seth Chandler

Catrisk will be attempting to live blog the Texas Senate session today that starts at 11 a.m. You can access the video here. I can’t promise I’ll be able to do the entire session as various day job events may intervene. I have no idea if S.B. 1700 will come up today and, if so, what amendments might be proposed. I can say that my “Minimalist Fix” post has gotten an awful lot of hits in the past few days.

11.42

Senate recesses until 11 a.m. Wednesday, May 15, 2013. Still no S.B. 1700.

11.22

Reading and referring various bills to committees. Does this mean voting on bills out of committee is over for today?

11.03

Actual debate on the floor. Not about windstorm insurance but about the right to marry. And not about gay marriage but about photo identification. Should one need photo identification as a prerequisite to marriage?

10.44

Not that it has anything to do with windstorm insurance, but an interesting bill for insurance junkies on subrogation rights and the “make whole doctrine”. H.B. 1869. I’ll have to read it.

10.35

Now calling bills for review. So the procedure seems to be

1) Suspend regular order of business so that the bill can be considered “out of order”; Vote on this.

2) Floor amendments offered and voted on.

3) Move passage to third reading.

4) Motion to suspend the 3 day delay between second and third reading

5) Third reading of bill (just caption)

6) Motion for final passage. Roll call vote.

10.09

Session begins.

10.01

Upbeat music now playing heralding the possible start of session. Also, please note that due to some issue with my liveblogging software, the time stamps are an hour off. So, if this says 10:02 I believe it means 11:02.

09.58

Nothing happening. Various people milling around. No sound, but I am hoping that is because the microphones are off rather than any issues with my Internet feed.

Live blog of Texas Senate on S.B. 1700 — or, as it turns out, not

Posted on May 13, 2013 by Seth Chandler

This is a placeholder in the event the Texas Senate takes up S.B. 1700 this afternoon. No guarantees that anything will be here, but matters seem to move swiftly in the Texas Senate, so I am setting things up ahead of time.

13.35

Motion to adjourn until tomorrow. Passes. So no S.B. 1700 today. #SB1700 #TWIA

13.34

Motions being heard to suspend Senate rules to permit announcements of urgent committee meetings. No sign of S.B. 1700.

13.31

I get the sense that if you watched this Internet broadcast for a few days you might actually understand Senate procedure pretty well.

13.26

Wow, things move fast once they get to the Senate floor. My sense is that everything is negotiated out ahead of time off the floor. Still no sign of S.B. 1700. We are hearing reading and referral of various bills.

Texas Senate may take up S.B. 1700 today

Status

The Texas Senate via the internet

There are rumors that the Texas Senate may take up S.B. 1700 today. You can watch the Senate in action here. In the mean time, the Senate is also taking up another important issue, state retiree health insurance. If they get to S.B. 1700. I will try to live blog, but no promises. You can also get Tweets from Rick Spruill of the Corpus Christi Caller at @Caller_Rick.