On Monday, at a special meeting of the House Insurance Committee, State Senator Larry Taylor blasted the decision of the board of the Texas Windstorm Insurance Association not to enforce laws requiring policyholders repairing their property to follow applicable building codes. Senator Taylor complained vociferously that the continued disregard of the Texas Insurance Code, particularly in favor of policyholders that TWIA had paid off in litigation involving Hurricane Ike in 2008, represented a failure of TWIA to mitigate further damages to the Association. That criticism was heeded only partly Tuesday by the the TWIA board when it voted not to cancel policies that had been issued without legal authority but only to decline to renew them. The TWIA board further decided not to begin non-renewals as soon as possible but to wait instead until January of 2014 — after the 2013 storm season — before even beginning the to decline renewals.
TWIA’s position is difficult to understand. Based on comments both at the hearing Monday and the Board meeting Tuesday, TWIA officials appear to acknowledge that they have issued policies — apparently several thousand — they are not authorized to issue. Their excuse has been compassion — that it may have been difficult in the aftermath of Hurricane Ike to bring properties up to the higher code. But, as with the insurable interest doctrine, insurers who issue policies in violation of the law generally have a right not to pay on claims brought under them and thus, presumably, to cancel them. Cruel as it may seem, that’s the traditional way of vindicating many public policy concerns. The TWIA board did not receive any public legal advice saying it would violate any laws by simply canceling the policies forthwith. Property insurance, unlike life insurance, is not burdened with incontestability laws.
The problem with the compassion excuse is that the TWIA board is being “compassionate” spending other people’s money. Adherence to building codes greatly reduces losses. So when TWIA’s losses are heightened due to the failure of some policyholders to make repairs up to code (for years), it ends up burdening all those who have to pay for TWIA’s losses. This group includes other TWIA policyholders who do comply with the law, sometimes at considerable expense. These policyholders have responsibility for paying off any Class 1 bonds that are issued. It also includes coastal residents who do not have TWIA policies but who will be surcharged following the issuance of some Class 2 Bonds, and insureds throughout Texas who will likely see rate increases when insurers are assessed to pay for Class 2 and Class 3 bonds.
The decision of TWIA’s board may also give rise to legal disputes down the road. Presumably the reason the legislature insisted on compliance with building codes was to reduce future losses to TWIA and to reduce thereby the risk that non-TWIA policyholders would have to pay post-event bonds. So, when the TWIA board declines for a lengthy period to enforce that law, they unlawfully expand the potential exposure of these third parties. Might not some of the better advised third parties, such as large insurance companies, seize upon clear violations of state underwriting laws as a basis for declining to pay at least part of any assessment made against them? Might they not plausibly argue that some percentage of their assessment liability should be withheld due to violations of law? Alternatively, might they not bring a cause of action against the TWIA board for breach of duty? And might even the threat of these legal challenges make it yet more difficult to market the post-event bonds in the first place. TWIA has handed those responsible for repaying these bonds an excuse not to do so.
Perhaps only the Texas Department of Insurance is entitled to compel TWIA to follow the law and some future court will find that no private rights of action exist. Perhaps some future court will hold that the statutory restrictions on underwriting were not intended to benefit third parties such as member insurers. But, I would not be so sure. It strikes me that there is a pretty strong argument to the contrary. I remain mystified as to why TWIA would create yet more problems for itself by continuing “compassion” for people who have, for years, declined to bring their properties up to code, particularly when they were given money to do so in Ike settlements. I likewise wonder if the Texas Department of Insurance, which has significant operating authority over TWIA, might urge it act far more promptly and with far less “compassion” in shedding itself of exposure the legislature prohibited it from assuming.