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 (http://catrisk.net). 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 catrisk.net. You can see the most relevant entries at http://catrisk.net/documents-show-texas-agencies-aware-serious-problems-post-event-bonding/, and http://catrisk.net/texas-insurance-commissioner-trying-fix-fatal-bug-windstorm-statute/, and in an op-ed in the Houston Chronicle available here http://www.chron.com/opinion/outlook/article/Commentary-Windstorm-insurance-has-Texas-in-5315395.php.
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.
Seth J. Chandler
Please note. The views expressed here are my own and do not necessarily reflect those of the University of Houston.