The next set of big lawsuits involving coastal windstorm insurance may not be targeted at the Texas Windstorm Insurance Association but rather against insurance agents in Texas who continued to sell TWIA policies without warning policyholders of the special risks involved. Under Texas precedent, an insurance agent may be held liable for the loss suffered by a policyholder if the agent knew that “the insurer was insolvent at the time the policy was taken out.” Agents can also be held liable if “at a later time when the insured could be protected, the agent knows or by the exercise of reasonable diligence should know, of facts or circumstances which would put a reasonable agent on notice that the insurance presents an unreasonable risk.” Higginbotham & Associates, Inc. v. Greer, 738 S.W.2d 45 (Tx. Ct. App. 1987). Given TWIA’s financial statements showing a negative surplus, the admission of a board member yesterday that, unless it gets the Texas Insurance Commissioner to reverse course and authorize a $500 million loan, it will not be able to pay claims promptly on even a moderate storm, and given the growing amount of media publicity about TWIA’s financial plight, there may well now be enough evidence to trigger the duty to disclose.
Arguments for the Defense
Arguments based on common law
To be sure, few policyholders will have an open and shut case against their agent. The policyholder will have to show there was something they would have done differently — acquired other insurance, perhaps taken heroic steps to protect their property — in order to get damages beyond a return of premiums. For some policyholders, there may have been little that they realistically could have done differently. Moreover agents will be able to defend on grounds that TWIA’s financial position was equivocal or on grounds that a negative surplus does not have quite the usual meaning of “insolvency” where the insurer has a statutory right to borrow or has a Catastrophe Reserve Trust Fund that perhaps should count as an asset. Cf. Guidry v. Environmental Procedures, Inc., 388 S.W.3d 845 (Tx. Ct. App. 2012) (“We have found no Texas case applying these principles to allow recovery against an insurance agent in the absence of evidence that the carrier was insolvent”). Some agents may even say that the degree of notice that would trigger a duty did not exist.
Arguments based on statute
And, there’s actually a second type of defense agents are likely to offer: Subchapter L-1 of the Texas Insurance Code. Agents that are sued for failure to warn will likely argue that section 2210.572 of the Texas Insurance Code, contained in Subchaper L-1, states that it provides the exclusive remedy “for a claim against the association, including an agent or representative of the association.” And what is a claim against an agent of the association? Section 2210.571 defines it very broadly as “includ[ing] any other claim against the association, or an agent or representative of the association, relating to an insured loss, under any theory or cause of action of any kind, regardless of the theory under which the claim is asserted, the cause of action brought, or the type of damages sought.” (emphasis added). So, these agents will argue that, unless a remedy can be found in Subchapter L-1, policyholders suing an insurance agent when TWIA can’t pay can’t sue on a theory of failure to warn.
The strength and the difficulty of this argument lies in the fact that when one looks at the remainder of Subchapter L-1, it provides no remedy at all against agents of the association. Everything is in terms of claims against the association itself. While on the one hand this might fortify the agents’ argument that Subchapter L-1 gives them protection, on the other hand it suggests that the type of “agent” spoken of in section 2210.571 and 2210.572 is not the “agent” that sells the policy but rather some sort of internal agent of TWIA such as an adjuster, officer or employee, the sort of agent for which TWIA might have vicarious liability. Surely, this rejoinder proceeds, the legislature would have spoken more clearly if meant that no claim could ever be brought at all against an agent for whom TWIA is not vicariously liable when TWIA could not pay a claim for which it had accepted responsibility. Moreover, the whole point of Subchapter L-1 is really to displace bad faith type claims and to provide an administrative mechanism for cases involving disputed coverage, not to displace the entirety of the common law of insurance.
Such a rejoinder limiting the scope of L-1 preemption would be fortified by TWIA’s own documents. Set forth below is a picture of TWIA’s web site. Consistent with the idea that insurance agents selling TWIA policies are not TWIA agents, and consistent with the idea that the purpose of Subchapgter L-1 in H.B. 3 was to protect TWIA itself and less so people selling its policies, this web site indicates that TWIA does not regard people who sell TWIA policies as its agents.
So, while Subchapter L-1 may give insurance agents a defense in future litigation, it would not be prudent to rely on it 100% as a reason not to warn TWIA policyholders.
Reasons for Concern
Notwithstanding these defenses, if I were a Texas insurance agent, or if I were the errors and omissions carrier for these agents who will actually be responsible for a duty of defense and indemnity where their insureds are sued, I’d be quite concerned. Right now, according to TWIA’s own financial statements, it has a negative surplus that many would see an indicator of insolvency. The defenses I outlined above are not iron clad. They are not the sort of defenses that would prevent many a defendant from having to settle for a substantial sum of money. They may not be the sort of defenses that prevail on a summary judgment motion or that insulate agents from juries in counties that have just been devastated by a major storm. Lawsuits like the one’s hypothesized will not be fun for agents, particularly given a concern that some jurors might be predisposed to look at error and omissions carriers or even personally wealthy agencies as providing a nice additional source of disaster relief.
The Smart Decision
The safest course for agents starting immediately will be to advise existing clients in writing about the potential for TWIA not to be able to pay claims promptly or in full and certainly to advise clients upon requests for renewal. If the agent loses a few commissions as a result, I promise that will be a fantastic tradeoff against the headaches a series of lawsuits will bring. The tone of the communication does not have to be hysterical. There is a decent chance there will be no storm that bankrupts TWIA over the next storm season and there is also a non-zero chance that TWIA will be able to borrow as planned to meet its needs. But the communication needs to disclose that there are now special risks. Perhaps the error and omission carriers could be proactive and help the agent craft an appropriate letter?
If I were a TWIA policyholder and my agent were on real or constructive notice of TWIA’s financial condition, I would want to know. And if my agent did not tell me and my house was damaged in a storm this summer and I found that TWIA wasn’t paying promptly or in full, I’d be going to a lot of lawyers looking for someone to sue. That someone would, as a good lawyer would recognize, be right there in front of them. Their insurance agent, probably with money and probably with an errors and omissions liability insurance policy that provided an additional source of money on which to collect, would be one of the first targets that lawyer would look to in order to make their client whole.
Note: Shortly after I originally posted this entry, an insurance agent reminded me that subchapter L-1 (enacted in 2011 as part of H.B. 3) of Chapter 2210 which governs the Texas Windstorm Insurance Association might have a broader scope than I realized. It might substantially alter what I had to say about agent liability. Upon further review, I believe the agent has an interesting point. The paragraphs on subchapter L-1 have thus been added to address that matter.