An open letter to State Representative Todd Hunter

Dear Representative Hunter,

My purpose in writing is to urge you to consider the risk to your constituents by letting the fate of the many policyholders of the Texas Windstorm Insurance Association rest on a flimsy regulation that is likely to be the subject of a length court challenge. I understand your position that the statutes and regulations currently in place do not adequately share the risk of catastrophic events throughout Texas. But fundamental decisions on that matter will not be resolved by the Texas legislature before the 2014 hurricane season is well underway. You are widely considered a champion of Texas coastal interests. You have a responsibility to your constituents to think this matter through very carefully. And you need to do it now.

There is a short run emergency in the TWIA funding situation on which people, like me, and, more importantly, inland legislators might well be able to reach agreement with coastal interests on a tolerable fix.  I urge you therefore to put personalities and long-standing battles aside, and work together immediately.  You will need to plead with Governor Perry to call a short and limited special session of the Texas legislature in order to do so. I am not an expert on Texas politics, but my sense is that you will need to compromise in that request and not ask for any fundamental reforms of windstorm insurance systems; you may need to compromise further and accept a plan that at least temporarily hardens what you regard as an undue burden on the Texas coast.  The alternative, however, is so bad, that you would be doing your constituents a yet worse disservice by failure to make the request.

You asked in a recent television interview on KRIS-TV that people, and my impression from the report was that I was included, stop complaining, stop criticizing and start working together constructively.  I was a bit puzzled by this statement because I have heard such offers from you before only to find that, when I accepted, your staff informed me that your busy schedule did not permit you ever actually to talk, even by phone. Perhaps they misunderstood your desires. Not meeting is, of course, your privilege. But there is no legislative session going on right now that should prevent you from meeting now either by phone, Skype or in person. Although you and I are not likely ever to agree on the structure of windstorm insurance funding in Texas, I am definitely willing to work with you and other Texas legislators any time, any place, on either trying to find intelligent compromises or, as here, preventing absolutely needless disasters from happening.

Here’s the emergency. I know that TWIA funding is a contentious minefield, but I am going to describe it in a way on which I think everyone can agree.

1. TWIA does not and will not have enough cash on hand to pay for a significant tropical cyclone hitting Corpus Christi or other densely populated parts of the Texas coast during the 2014 hurricane season.

2. TWIA’s reinsurance is unlikely to attach at low enough levels so that it, if TWIA has difficulty borrowing, the reinsurers will provide the cash necessary to pay claims.

3. TWIA’s ability to borrow money following a tropical cyclone rests on a statute that has never been used before.

4. Lenders in the past have balked when asked whether they would loan TWIA up to $1 billion in “Class 1 Bonds” when the payback mechanism for those bonds are (heightened) premium revenues from TWIA policyholders. There is thus a substantial risk that not all of the Class 1 Bonds would be salable. The failure of Class 1 Bonds to sell, prior to 2011, would have toppled the entire post-event bonding scheme developed by the Texas legislature and would leave TWIA with no cash with which to pay claims following a significant storm.

5. In 2011, the Texas legislature considered this contingency and amended Chapter 2210 of the Texas Insurance Code to add section 2210.6136. It provides a contingency plan in the event that the Class 1 Bonds are unsalable.  The idea behind section 2210.6136 is to permit Class 2 Bonds to be issued through the Texas Public Finance Authority even if the Class 1 Bonds do not sell in full and to thereby permit Class 3 Bonds, which are repaid via assessments on insurers, to be sold if need be.

6. Given the high likelihood that Class 1 Bonds will not be fully salable and given the necessity of TWIA to borrow in order to be able to pay claims following a major storm, Texas depends on section 2210.6136 being a coherent statute, the type of statute that potential lenders believe will provide a legal basis for their claims to repayment.

7. The Texas Public Finance Authority had initial difficulty understanding section 2210.6136 based on its text and met with legislative staff in order to obtain an explanation of how it worked. TPFA described its staff and advisors as “struggling with the mechanics of financing” under section 2210.6136.

8. Legislative staff explained the intent of the statute as being one under which Class 2 Bonds would be initially paid 30% from assessments on insurers and 70% via surcharges on certain coastal insurance policies but under which TWIA policyholders would be required –insofar as possible — to repay the insurers and coastal insureds up to $500 million of their bond amortization payments.

9. The Texas Department of Insurance has issued draft regulations that implement the interpretation of the statute offered by legislative staff but acknowledge in the preface the the regulations that this interpretation is impossible or difficult to reconcile with the language of the statute.

10. Insurance companies in Texas will be forced to pay more in assessments under the TDI interpretation of section 2210.6136 than under a literal reading of the statute. Certain coastal insureds will also have to pay more.

11. Insurance companies may have duties to their shareholders and/or it may be in their best economic interests to challenge regulatory interpretations of statutes that are contrary to the language of the statute and require them to pay more than they would under a literal reading of the statute. Sophisticated coastal insureds and/or those advised of the situation may likewise have an incentive to bring legal challenges to regulations requiring them to pay more than they would under the statute.

11a.  This is the one point that I acknowledge might be contestable.  It is unlikely that a court would swiftly dismiss the claims of those challenging regulations that are, at best, difficult to reconcile with the language of the statute. Those challenging the claim have a significant chance of prevailing.

12. Lenders who might otherwise loan TWIA money via Class 2 Bonds will be reluctant to do so if they are aware of items 1-10 above. They will not lend if they believe there is likely to be a length court challenge to the bond payment mechanism.

13. If lenders do not lend TWIA money, TWIA will not have enough money to pay claims following a major storm. If so, there will be devastation of TWIA insureds, great derivative harm to almost everyone on the Texas coast, and significant derivative harm to others in the Texas economy. Although the strength of interests may vary, it is not in anyone’s interest that the TWIA funding stack collapse due to a legal technicality.

I have thought about this for some time.  And the only point on which I believe some might disagree is item 11a. If you really believe that the risk of a serious challenge is extremely low, then there is no emergency. If, however, you believe as I do, that the risk of a serious challenge is significant, then indeed we have an emergency. There is a really serious risk that TWIA policyholders will not be paid any time soon following a significant storm this summer.

What bothers me most is that, unlike many problems, this one is very solvable. The Texas Insurance Commissioner, Julia Rathgeber, appointed by Governor Perry, has already come up with a solution. Simply turn the language of the law into what legislative staff believe it was supposed to say. That will require almost no effort.  One simply has to relabel the regulatory provisions she has proposed as a statute, get the legislature to pass it, and get the Governor to sign it and the situation is resolved.No more emergency.  Lenders should feel way more comfortable loaning TWIA the money.

Yes, some insurers may balk at the solution. But the very fact that one thinks they might do so is a sign that they will in fact litigate if no statute is passed and the same result occurs through an ultra vires regulation. By claiming that insurers will object to a legislative change that purports merely to clarify the status quo, one essentially acknowledges that the current situation is untenable.

And you, Representative Hunter, are likely to find the Rathgeber solution a difficult pill to swallow. It does burden the coast with 70% of the bill for Class 2 bonds. Some of your more militant constituents could be angry about this.  Here is what you need to explain to them.  I am optimistic that there will be enough reasonable people on the Coast that such an explanation will be satisfactory.  You are not bargaining from a position of strength.  The law already was intended to burden the coast with 70% of the bill for Class 2 bonds.  There is nothing knew with the proposed statute.  What it is doing is making sure that something even worse does not happen: TWIA collapsing due a technical glitch and blue roofs staying on coastal homes for a very, very long time.  You can assure your constituents that you will seek a better solution during the next regular session of the legislature but that, for now, improving the language of the statute without changing its meaning is a major improvement.

There are, of course, other solutions.  You could, for example, try to flip responsibility for Class 2 Bonds such that 70% of the burden is on insurers and only 30% on the coast.  There are lots of other mechanisms for spreading the risk of windstorm farther inland. But do you really think you will reach agreement on such a significant reform during a special session when you were unable to do so last session? The one “focal point equilibrium,” the one thing on which you and inland representatives might agree is to make the statute actually say what, supposedly, various staff members said it intended.

Finally, I suppose it is possible that you believe that the rest of Texas will come in and rescue the coast if TWIA collapses and that you should not accept a solution that solidifies a current scheme that you think is fundamentally unfair.  All I can say is that this is very high risk poker. Trying to resolve TWIA funding after a major storm in some special session of the legislature is likely to stalemate and also likely to result in statutes that are actually worse for the coast than the status quo. The process is not likely to be swift and the emotional and financial stress on the coast while the matter being debated is extraordinarily ugly.

As I indicated in a somewhat similar open letter to Governor Perry this past week, I know that you can not trust me on critical item 11a. But you are a lawyer and you certainly know lots of open minded lawyers.  You also know, I suspect, lots of insurance representatives.  Ask them if they believe the regulation enacted by the Texas Insurance Commissioner on which the TWIA funding stack depends is unlikely to be challenged in court.  Ask them if they believe such challenges would survive, for example, a motion to dismiss. Or go find institutional lenders.  See if they would be willing to lend if they got wind that insurers or some coastal interests might challenge the pay back mechanism.  If all you get are assurances that the University of Houston professor is off his rocker or just scaring people, then, fine, ignore me.  I am sincerely sorry for what would be a false alarm.  My strong suspicion, however, is that these people are going to tell you that I have a serious point.

One way or another you need — right now, before hurricane season hits full swing — to be assured that lenders will loan TWIA funds on Class 2 Bonds when the Class 1 Bonds can’t issue.  Maybe there are ways of getting this other than a special session of the legislature. I am not sure what these methods would be.  But until you have that, as a champion of the Texas coast, you need to be on the front lines, making common cause with whomever you can, saying that this provision of the law needs to be fixed by the Texas legislature right now.



The views expressed here are my own and do not necessarily reflect those of the University of Houston.



An Open Letter to Governor Perry

The following is a copy of a letter I am sending today to Governor Rick Perry.

Dear Governor Perry,

I am Seth J. Chandler, a 24-year resident of Harris County, Texas, and Foundation Professor of Law at the University of Houston specializing in insurance law.  I am also the author of the blog Texas Windstorm: The law and finance of insuring catastrophic risk in Texas (  I have testified on numerous occasions before the Texas legislature on regulation of windstorm risk and finance. I have also served on your Texas Health Care Policy Council under the leadership of Tony Gilman.

I am writing to alert you of a serious and urgent problem that has come to light with the funding scheme for the Texas Windstorm Insurance Association. I urge you to call a Special Session of the Texas legislature to address it immediately.  I believe that you can properly confine the agenda so that even legislators who often disagree on TWIA matters can come together to fix this particular problem. If the problem is not resolved, there is a significant probability that, following even a modest tropical storm hit on a densely populated area of the Texas coast such as Galveston or Corpus Christi, the Texas Windstorm Insurance Association would not be able to pay claims in a timely way. TWIA might have grave difficulty ever paying them.  Substantial delay in payment or non-payment of claims by the largest insurer on the Texas Coast would be a needless disaster for the entire Texas economy and would likely result in a special legislative session anyway, but in the worst possible circumstances.

The problem, in a nutshell, is section 2210.6136 of the Texas Insurance Code, which addresses how “Class 2 Bonds” issued to pay TWIA claims are to be paid back. The current Insurance Commissioner Julia Rathgeber, former Commissioner Eleanor Kitzman, the Texas Public Finance Authority and others all agree that the provision is confusing and poorly drafted.  Indeed, I know of no one who thinks that section 2210.6136 is clear.  Everyone I know who has looked at the statute says that, if interpreted as it was written, it creates an unworkable plan to pay back Class 2 Bonds.

The issue is whether the Texas Insurance Commissioner has now crafted a fix to section 2210.6136 via regulation that will stand up in an inevitable legal challenge.  I believe the answer is “no.” Commissioner Rathgeber has developed a sensible idea in her regulation that might prove the foundation for future legislative action. But her regulation is, as I believe she admits on pages 10-13 of the January 28, 2014, submission of the draft, contrary to the language of the statute.  The evidence I have seen that would justify a court in interpreting the statute contrary to its language is weak. There is thus a substantial risk that, without legislative ratification, her interpretation of the existing statute will be found an invalid exercise of law-making power and struck down by the courts. Both Texas insurers subject to a heightened assessment from TWIA and, for example, automobile insurance policyholders on the Texas coast would have standing to challenge the regulation and the extra payments they would make as a result. And even if her interpretation were ultimately to be sustained by a Court, a challenge would likely have sufficient merit to avoid early dismissal. It would likely take at least a year to resolve through the judicial system and appeals.  The specter of litigation will deter needed lenders from extending up to $1 billion in credit via Class 2 Bonds that TWIA would need to pay a major claim. In the mean time, blue roofs would cover the Texas coast as a result of unpaid claims.

I have outlined my legal opinion in more detail on my blog  You can see the most relevant entries at, and, and in an op-ed in the Houston Chronicle available here

I understand that, just based on a letter from a professor you do not know, you cannot call a Special Session of the legislature. I implore you, however, to trust me enough to seek urgent clarification from the Attorney General or from others qualified to provide legal advice.  If they say I am wrong and the Texas Insurance Commissioner’s fix is so clearly lawful that the risk of disruptive litigation is minimal, then great.  If they say that the problem can be resolved by other forms of non-legislative action, such as a formal letter from the Attorney General validating the Texas Insurance Commissioner’s action, good; let such a letter issue promptly. If not, however, I would urge you to call a Special Session before hurricane season starts again. I believe Commissioner Rathgeber’s regulations could be adapted swiftly and easily into a statute so that the matter could be resolved in a few days. Although coastal interests and inland interests do not always mesh on TWIA funding issues, it is in absolutely no one’s interest that TWIA fail due to a drafting problem.  I am thus optimistic that legislative leaders in the area such as Senators John Carona and Larry Taylor and Representatives John Smithee and Todd Hunter might be able to work cooperatively on this limited issue. Other issues involving TWIA on which consensus is less likely can be handled through more regular process.

I remain happy to work with your staff, the Texas Insurance Commissioner, legislators and their staff to do anything I can to help explain the issue and suggest resolutions. My other credentials are attached to this letter.

Sincerely yours,

Seth J. Chandler

Please note.  The views expressed here are my own and do not necessarily reflect those of the University of Houston.


Lawsuit filed against TWIA for failure to assess fully for Ike

A policyholder of the Texas Windstorm Insurance Association has filed a lawsuit against that state-created entity and its current board of directors as a result of the failure of TWIA following Hurricane Ike to assess Texas insurers more fully under the law as it existed at the time. The lawsuit, filed in a state district court in Travis County (copy of lawsuit here), seeks a court order directing the current directors to assess TWIA member insurers for up to $600 million and to pay damages to the policyholder, Ramiro “Gamby” Gamboa of Corpus Christi, Texas. It is very unlikely, however, that the case will succeed in making any more money available for current policyholders of the deeply troubled largest insurer of windstorm risk on the Texas coast.

Mark Kincaid

Mark Kincaid

The plaintiff is represented in the action by Texas “Super-Lawyer” Mark Kincaid, a former head of the office of Public Insurance Counsel in Texas. The lawsuit is the latest in a series of steps by coastal interests, most visibly led by Corpus Christi State Representative Todd Hunter to find ways of buttressing the desperate finances of the Texas coast’s largest windstorm insurer. TWIA will likely respond to the lawsuit in the next three weeks or so. The members of the board of directors who have been sued will likely be notifying their Directors and Offices Liability Insurer of the suit, assuming TWIA procured such coverage for the current year, and requesting that they provide a legal defense to the claims. Whether or how Texas insurers who would be liable for the assessment in the event the lawsuit succeeds will intervene in the proceedings is not yet clear.

The major issue this lawsuit will face is that the statute that would have authorized TWIA to make the assessment was unquestionably repealed by the legislature in 2009. This blog has analyzed this issue extensively (see here and here) and concluded that the problem is likely insuperable. The short version is that in section 44(2) of H.B. 4409, the legislature in 2009, with knowledge that claims for Ike were still pending repealed sections 2210.058 and 2210.059, the provisions of the former law that would have authorized an assessment. That repeal without saving the right to assess for prior storms may have been foolish or it may have been part of some political deal involving insurers and coastal interests.  It may simply have been prophetic drafting by legislators who place a high value on the interests of Texas insurers. Unless some argument can be made that the repeal, if interpreted in the fashion I believe is required by section 311.031 of the Government Code, violates policyholder rights under the United States or Texas Constitution, or unless attorney Kincaid has some extremely clever argument up his sleeve, would appear to end the matter. I guess we shall see. In a formal opinion, the Texas Attorney General, Gregg Abbott, has rejected the argument made in the Gamboa complaint that there was anything unlawful about TWIA using premiums from years after Hurricane Ike to pay for claims arising out of that storm.

Conceivably, some lawsuit might have been filed against the then-directors of TWIA at the time it failed to assess for Ike fully but that claim does not appear to exist in this lawsuit nor have the right individuals been sued.  Moreover, such a lawsuit based on actions in 2008 and 2009 would now run into statute of limitations issues since the claims are based on alleged failures that took place more than four years ago. The absence of such a claim is, in some sense a pity for TWIA historians, since those directors had at least constructive knowledge that the time for an assessment was about to expire and might possibly have known that the $430 million assessment they did issue was going to prove woefully low to pay for Ike claims and would thus burden current and future policyholders. If the Gamboa lawsuit survives motions to dismiss and discovery proceeds, however, the just-filed lawsuit  may bring some of those issues to light. The Texas Attorney General has previously declined to respond to a request from State Representative Todd Hunter that the failure to assess was negligent.